A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

Commodities and Development Report - Perennial Problems, New Challenges and Evolving Perspectives

Report by UNCTAD, 2013

Download original document

The aim of this report is to consider the factors that have shaped the commodities sector in recent years and in particular, the implications of the commodity boom of 2003–2008 for commodity-dependent developing countries.

COMMODITIES AND
DEVELOPMENT REPORT


U n i t e d n at i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t


Perennial problems, new challenges and evolving perspectives


C
O


M
M


O
D


ITIE
S


A
N


D
D


E
V


E
LO


P
M


E
N


T R
E


P
O


R
T


P
e


re
n


n
ia


l p
ro


b
le


m
s


, n
e


w
c


h
a


lle
n


g
e


s
a


n
d


e
v


o
lv


in
g


p
e


rs
p


e
c


tiv
e


s
UN


CTA
D


UNITED NATIONS


Printed at United Nations, Geneva – GE.13-50101 – March 2013 – 865 – UNCTAD/SUC/2011/9




COMMODITIES AND
DEVELOPMENT REPORT


U n i t e d n at i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t


Perennial problems, new challenges and evolving perspectives


New York and Geneva, 2013




ii


COMMODITIES AND DEVELOPMENT REPORT


Note


The designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part
of the United Nations Secretariat concerning the legal status of any country, territory, city or area, or of its authorities, or concerning
the delimitation of its frontiers or boundaries.


Material in this publication may be freely quoted or reprinted, but acknowledgement is requested, together with a reference to
the document number. It would be appreciated if a copy of the publication containing the quotation or reprint could be sent to the
UNCTAD secretariat.


Links and resources


For further information on the Special Unit on Commodities, please e-mail us at:


commodities@unctad.org


To access our publications, reports and statistics, which provide an in-depth view of commodity markets, trade and development,
please visit the following websites:


www.unctad.org


www.unctad.org/commodities


UNCTAD/SUC/2011/9




iii


acknowLedgements


AckNowledgemeNts


The Commodities and Development Report was prepared by a team consisting of Junior Davis (team leader), Rachid Amui, Leon-
ardo Garcia, Martin Halle, Alexandra Laurent, Claudia Roethlisberger, Kris Terauds and Yan Zhang. The work was carried out under
the overall guidance and supervision of Samuel Gayi, Head, Special Unit for Commodities (SUC) at UNCTAD.


The Report draws on background papers prepared by Dirk Bezemer, Junior Davis, Thomas Lines, Noémie Maurice and Omid
Rahmani.


Comments were received from Kelvin Balcombe (Professor, University of Reading), Dirk Bezemer (Professor, Groeningen University),
Tony Guida (Senior financial market analyst), Paul Hare (Emeritus Professor, Heriot-Watt University), Raphael Kaplinsky (Professor,
The Open University). Thomas Lines (consultant for commodity trade), David Luke (Senior trade adviser and coordinator of the
Trade and Human Development Unit, UNDP), Machiko Nissanke (Professor, School of Oriental and African Studies, University of
London), Massimiliano Riva (Trade specialist, Trade and Human Development Unit, UNDP), Dominic Stanculescu (consultant trade
economist), and Christopher Stevens (Senior research associate, Overseas Development Institute). Lisa Borgatti, Elizabeth Jane
Casabianca, Giovanni Valensisi and Anida Yupari, colleagues at UNCTAD, also provided comments.


Secretarial support was provided by Danièle Boglio and Catherine Katongola-Lindelhof. The cover and other graphics were
prepared by Nadège Hadjemian and Nathalie Loriot carried out the desktop publishing. The text was edited by Praveen Bhalla.




iv


COMMODITIES AND DEVELOPMENT REPORT


coNteNts


NOTE .................................................................................................................. II


ACkNOwLEDgEMENTS ...................................................................................... III


ExPLANATORy NOTES ......................................................................................... Ix


gLOSSARy Of TERMS ........................................................................................xII


AbbREVIATIONS ................................................................................................xIV


OVERVIEw .........................................................................................................xV


Chapter 1:


REVISITINg ThE “COMMODITy PRObLEM” ..............................................................1


1. Introduction ........................................................................................................................................................ 2


2. Commodity dependence, poverty traps and vulnerability ..................................................................................... 2


3. Commodities, Ricardo and the Prebisch-Singer hypothesis ................................................................................. 9


4. Commodityrevenuesasadriverofdiversification ............................................................................................. 11


5. Managing commodities ..................................................................................................................................... 13


5.1. Commodity revenues as a “resource curse” revisited .............................................................................. 13


5.2. Extractive sectors: ensuring an equitable distribution of windfall gains .................................................... 13


5.3. Agriculture: securing commodity rents .................................................................................................... 14


6. The commodity problem: some preliminary views ............................................................................................ 15


Chapter 2:


COMMODITy bOOM AND buST IN hISTORICAL PERSPECTIVE: NEw TwISTS...........29


1. Commodity boom and bust in historical perspective .......................................................................................... 30


1.1. Overview of price trends, 1960–2011 ..................................................................................................... 30


2. The commodity booms of the 1970s and 2000s compared ............................................................................... 31


2.1. World industrial production ..................................................................................................................... 32


2.2. United States exchange rates and global monetary conditions .............................................................. 34


2.3. Effect of changes in real exchange rates on commodity prices ................................................................ 36


3. New “twists” to the perennial commodity problem ............................................................................................ 39


3.1. Changing long-term demand patterns for commodities ........................................................................... 39


A. Financial investment in Treasury bills versus commodities ................................................................................ 40


B. Commodity derivative markets and commodity prices ....................................................................................... 42


A. Chinese demand for commodities ..................................................................................................................... 50


B. China’s impact on the prices of manufactures ................................................................................................... 52


3.2. Some policy responses ........................................................................................................................... 56




v


Chapter 3:


ThE DIRECT EffECTS Of ThE 2003-2011 COMMODITy bOOM: POVERTy AND
fOOD INSECuRITy...............................................................................................69


1. The direct effects of the 2003–2011 commodity boom on CDDCs ..................................................................... 70


1.1. Introduction ............................................................................................................................................ 70


1.2. Rising food prices and food insecurity ..................................................................................................... 70


1.3. Food price volatility ................................................................................................................................. 75


1.4 Various aspects of food security .............................................................................................................. 77


1.5. Potential poverty impacts of rising and volatile food prices ..................................................................... 83


2. Policy response: Employing emergency food reserves to overcome food insecurity ........................................... 88


2.1. Emergency food reserve systems ............................................................................................................ 88


A. Selecting achievable objectives ........................................................................................................................ 90


B. Scale and components of a reserve system ...................................................................................................... 92


C. The commodity mix to be stockpiled ................................................................................................................. 93


D. Aligning the interests of exporters and importers, and rich and poor neighbours ............................................... 93


2.2. Key considerations for addressing food insecurity through emergency food reserves .............................. 94


Chapter 4:


INDIRECT EffECTS Of ThE RECENT COMMODITy bOOM: STRuCTuRAL AND
fINANCIAL IMPACTS .........................................................................................105


1. Introduction .................................................................................................................................................... 106


2. Structuralandfinancialeffectsofthecommodityboom .................................................................................. 106


2.1. Trends over time and by country income groups ................................................................................... 106


3. Commodity growth exposure and its consequences ....................................................................................... 109


3.1. Measuring commodity growth exposure ................................................................................................ 109


3.2. Exploring the consequences of commodity growth exposure ................................................................ 110


3.3. Econometric analysis ............................................................................................................................ 114


4. Commoditydependenceinthecontextoffinance-drivenglobalization ............................................................ 118


4.1. Commoditydependence,internationalfinanceandgrowth:lessonslearned .......................................... 118


4.2. ForeigndirectinvestmentbyfirmsandStates ...................................................................................... 123


5. Land acquisition as a category of FDI in the commodities sector ..................................................................... 124


6. Policy implications ......................................................................................................................................... 126


Appendix 1: CDDC data coverage ................................................................................................................................ 130


Appendix 2: Model ....................................................................................................................................................... 133


taBLe oF contents




vi


COMMODITIES AND DEVELOPMENT REPORT


Chapter 5:


PERENNIAL PRObLEMS, NEw ChALLENgES AND SOME EVOLVINg
PERSPECTIVES .................................................................................................141


1. Perennial problems, new challenges and some evolving perspectives ............................................................. 142


1.1. Mainfindings ........................................................................................................................................ 142


1.2. Severed link between higher export prices and domestic income growth .............................................. 143


1.3. Broad policy perspectives ..................................................................................................................... 144


2. Development strategies and reform of the international architecture ............................................................... 145


Figure


1. 1. Regional distribution of CDDCs, 2009-2010 average ................................................................................................. 6


1.2. Commodity dependence and export concentration in CDDCs, 1999–2000 and 2009–2010 averages ........................ 7


2.1. Non-oil commodity price index in constant terms, 1960–2011 (2000 = 100) ........................................................... 30


2.2. Evolution of real price indices of commodities, 1960–2011 ..................................................................................... 31


2.3. Average annual growth rate of industrial value added, 1971–1980 to 2001–2009 (per cent) ................................... 32


2.4. Share of manufacturing in GDP, by country groups,1980–2009 ............................................................................... 33


2.5. Growth rate in world manufacturing value added and energy use 1970-1972 to 2006-2008
(3-year moving average) ......................................................................................................................................... 33


2.6. Evolution of real interest rates in the United States and real price index of commodities, 1960–2011 ...................... 35


2.7. United States real exchange rate and real commodity prices, 1960–2011 ............................................................... 36


2.8. Price of crude oil compared with (a) share of crude oil and petroleum in total .......................................................... 37


goodsimportsoftheUnitedStates,and(b)theUnitedStatestradedeficitasapercentageofGDP,2001–2010. ..... 37
2.9. (a) Share of crude oil and petroleum in EU goods imports vs. crude oil price; (b) Euro area goods trade


deficitasapercentageofGDPvs.crudeoilprice,2001–2010 ......................................................................................38
2.10. Evolution of the nominal euro-dollar exchange rate and crude oil price, 2001–2010 ................................................ 38


2.11. AggregatebalancesheetofUnitedStatesnon-farm,non-financialcorporatebusiness,2006–2010
(annual growth rate) ................................................................................................................................................ 41


2.12. Evolution of commodity trading contracts on world exchanges, 2000–2011 (millions) ............................................. 42


2.13. Commodity trading as a share of global derivatives trading, 2003–2010 (Per cent).................................................. 43


2.14. OTCderivativestradingofcommodities,2000–2010($ billion) ............................................................................... 43
2.15. Relative performance of commodities as an asset class (no. of years to 31 August 2011) ........................................ 44


2.16. Evolution of Goldman Sachs commodity indexes compared with S&P 500 Total Returns Index, 1970–2010 ............. 45


2.17. Chicago Board of Trade wheat and soybeans: non-commercial, non-index trader net long positions
compared with index trader net long positions, 2006–2011 .................................................................................... 45


2.18. World ethanol production, 2000–2009 (thousand barrels/day) ................................................................................. 47


2.19. Shareofethanolfrommaizeintotalworldmaizeconsumption,2003/04–2010/11(percent) ................................. 47
2.20. Maize:realpriceindexandtotaluse/endingstockratio,1990/91–2010/11 ............................................................ 48
2.21. Biofuel production, 2001–2009 (thousand barrels/day) ............................................................................................ 49


2.22. Chinese imports as a share of total soybean use, 2002/03–2009/10 (Per cent) ....................................................... 49


2.23. Soybeans: Ratio of total use/ending stocks and real price index, 1990/91– 2010/11 ............................................... 49


2.24. Wheat: real price index and use/ending stock ratio, 1990/91–2010/11 ................................................................... 50


2.25. China’s share in world imports of selected commodities (per cent) .......................................................................... 52


2.26. China’sshareofworldexportsofmanufactures,1995–2010($ billion) ................................................................... 53
2.27. Valueandvolumeofdealsintheglobalminingandmetalssector,2000-2011($ billion)......................................... 56
3.1. Food price spikes, 2001–2011 (2000=100) ............................................................................................................. 70




vii


taBLe oF contents


3.2. Evolutionofcerealimportsbylow-incomefood-deficitcountries,byvalueandvolume,1990/91–2008/09
(year-on-year percentage change) .......................................................................................................................... 71


3.3. Coefficientsofvariationforselectedcommoditiesintheshortandlongrun,1960-1970to2000–2010 .................. 75
3.4. Monthly value of the continuous commodity index, 1956–2012 ............................................................................... 76


3.5. Non-commercial futures trading, 2002–2010: a cause of cereal price volatility? .................................................... 77


3.6. FoodimportbillsofdevelopedanddevelopingcountriesandLIFDCs,2007–2011($ billion) .................................... 78
3.7. LDCs’ food trade balance, 1995–2009 .................................................................................................................... 79


3.8. Indicators of food security in LDCs, selected years .................................................................................................. 79


3.9. Shareandlevelofofficialdevelopmentassistancetodevelopingcountries,1975–2009 ......................................... 80
3.10. Cereal yields: developing countries versus world average, 1961–2009(Kilograms/hectare) ..................................... 81


3.11. AgriculturaltradebalanceofLDCs,1970–2009($ billion) ....................................................................................... 82
3.12. Share of consumer expenditure on food, selected countries, 2008 .......................................................................... 83


4.1. Structural transformation: rates of growth of value added in manufacturing and services, 1996–2009 (per cent) .. 107


4.2. Changes in life expectancy and spending on health and education, by income quintiles, 1995–2009 average ....... 107


4.3. Trendsinindicatorsofdomesticfinancialdevelopment,1995–2009 ..................................................................... 108
4.4. Trendsinforeignfinancialpositionsandexchangerates,1995–2009 ................................................................... 108
4.5. Commodity growth exposure by income quintiles, 1995–2009 average ................................................................. 110


4.6. Commodity growth exposure and growth of non-primary sectors and investment, by decile, 1995–2009
(Average annual percentage growth rate) .............................................................................................................. 110


4.7. Average annual commodity growth exposure and structural transformation,by decile, 1995–2009 average .......... 111


4.8. Commoditygrowthexposureanddomesticfinancialdevelopment,1995–2009average ....................................... 112
4.9. Commodityrevenuesandforeignfinancialpositions,bydecile,1995–2009average ............................................ 113
4.10. Asset accumulation and appreciation of the top two income quintiles before andafter 2002 ................................. 114


4.11. Commodity revenues and social indicators, all deciles, 1995–2009 average ......................................................... 114


Box


1.1. Terms of trade for commodities versus manufactures .............................................................................................. 4


chart 1. Evolution in the ratio of terms of trade of commodities to manufactures, 1950–2008 ......................................................5


1.2. Commodity dependence, structural change and growth ............................................................................................ 8


chart 2. Share of commodity groups in merchandise trade, 1995–2010 ................................................................................. 8


chart 3. Average annual growth rate of the 10 leading commodity exports of CDDCs, 1995–2010 ......................................... 8


chart 4. Exports of primary commodities by country groups, 2009–2010 average .................................................................. 9


2.1. The role of China in the boom in global commodity markets: Two schools of thought ............................................... 51


2.2. Foreign TNCs and CDDC natural resource development challenges ......................................................................... 54


2.3. Verticalintegrationandhorizontalconcentrationwithinthecocoa-chocolateglobalvaluechain .............................. 55
3.1. Exploring the impact of trade and export restrictions on food prices ....................................................................... 71


chart 1. Major food export restrictions imposed during 2007-2011 ...................................................................................... 72


3.2. Climate change and food insecurity ......................................................................................................................... 73


3.3. How vulnerable to price spikes are developing countries that are highly dependent on food and fuel imports? ........ 86


chart 2. Regional food and fuel imports as a percentage of total merchandise exports, 2002 and 2008 ................................ 86


chart 3. Sensitivity of developing countries to food and fuel imports, 2002–2008 ................................................................. 87


chart 4. Changes in terms of trade as a percentage of GDP for selected developingcountries, 2010 ..................................... 88


4.1. Chile’sstructuralfiscalbalancepolicy ................................................................................................................... 121
4.2. Chinese FDI in Africa’s commodity sector: some preliminary observations ............................................................. 122


chart 1. China’s trade, FDI and contracted projects in Africa, 1991–2008 ($ billion) ............................................................ 122




viii


COMMODITIES AND DEVELOPMENT REPORT


Table


1.1. Causes of deterioriation in the terms of trade of CDDCs, according to different authors ........................................... 10


2.1. Correlation between log S&P 500 Real Total Returns Index and log Goldman Sachs Commodity Real Total
Returns Index and Real Spot Price Index ................................................................................................................ 44


3.1. Policy responses to rising food prices in CDDCs, 2008–2010 .................................................................................. 71


3.2. Effects on poverty of the changes in relative food prices, Jan. 2005 – Dec. 2007. ................................................... 85


4.1. Effects of greater commodity growth exposure over time, by income group, 1995–2002 and 2003–2009 ............. 116


4.2. Tradeearnings,capitalinflowsandreservesofalldevelopingandemergingcountriesinthesample,
1990s and 2000s .................................................................................................................................................. 118


4.3. Developing and emerging countries’ SWF assets, as on Dec. 2011 ........................................................................ 120


A.1.1. Commodity growth exposure, commodity dependence and growth in commodity revenues, average, 1996–2009 ......131


A.1.1. Commodity growth exposure, commodity dependence and growth in commodity revenues, average, 1996–2009 ......132


A.1.1. Commodity growth exposure, commodity dependence and growth in commodity revenues, average, 1996–2009 ......133


A.2.1. Effect of commodity growth exposure on income growth, with and without control variables ................................. 135


A.2.2. Dependentvariable:shareofforeignfinancialassetsinGDP ................................................................................. 136
A.2.3. Dependent variable: logarithm of share of debt service in GDP .............................................................................. 137


A.2.4. Dependent variable: growth rate of GDP per capita (2005, PPP-corrected dollars) ................................................. 137


A.2.5. Dependent variable: change in real effective exchange rate .................................................................................. 138




ix


expLanatory notes


explANAtory Notes


Classification by country or commodity group


The classification of countries in this Report has been adopted solely for the purposes of statistical or analytical convenience and
does not necessarily imply any judgement concerning the stage of development of a particular country or area.


In this Report, commodity-dependent developing countries (CDDC) are defined as countries whose total commodity exports ac-
count for more than 60 per cent of total merchandise exports. Commodity exports for each country are reported as a percentage of
total national merchandise exports as at 2009-2010, the latest years for which international trade statistics are currently broadly
available.


The major country groupings used in this Report follow the classification by the United Nations Statistical Office (UNSO). They are
distinguished as:


• Developed or industrial(ized) countries: the countries members of the OECD (other than Mexico, the Republic of Korea and
Turkey) plus the new EU member countries and Israel.


• Transition economies refers to South-East Europe and the Commonwealth of Independent States (CIS).


• Developing countries: all countries, territories or areas not specified above.


The terms “country” / “economy” refer, as appropriate, also to territories or areas.


References to “Latin America” in the text or tables include the Caribbean countries unless otherwise indicated.


References to “sub-Saharan Africa” in the text or tables include South Africa unless otherwise indicated.


For statistical purposes, regional groupings and classifications by commodity group used in this Report follow generally those
employed in the UNCTAD Handbook of Statistics 2011 (United Nations publication, sales no. B.11.II.D.1) unless otherwise stated.
The data for China do not include those for Hong Kong Special Administrative Region (Hong Kong SAR), Macao Special Administra-
tive Region (Macao SAR) and Taiwan Province of China.


Other notes


The term “dollar” ($) refers to United States dollars, unless otherwise stated.


The term “billion” signifies 1,000 million.


The term “tons” refers to metric tons.


Use of a dash (-) between dates representing years, e.g. 2001-2010, signifies the full period involved, including the initial and final
years.


An oblique stroke (/) between two years, e.g. 1991/92, signifies a fiscal or crop year.


A dash (-) or a zero (0) indicates that the amount is nil or negligible.


Product classification


Exports are valued FOB and imports CIF, unless otherwise specified.




x


COMMODITIES AND DEVELOPMENT REPORT


For analytical purposes, merchandise exports and imports have been classified, where appropriate, according to main products
groups. Following the codes used in Standard International Trade Classification (SITC), revision 3, product groups as follows:


• Agricultural products: All food items + Agricultural raw materials


• All food items (SITC 0 + 1 + 22 + 4)


• Agricultural raw materials (SITC 2 less 22, 27 and 28)


• Minerals, ores and metals (SITC 27 + 28 + 68 + 667 + 971)


• Fuels (SITC 3)


• Manufactured goods (SITC 5 to 8 less 667 and 68)


• Primary commodities, precious stones and non-monetary gold (SITC 0 + 1 + 2 + 3 + 4 + 68 + 667+ 971)


What are commodities?


In this Report, a commodity is defined as any homogenous good traded in bulk. Commodities are most often used as inputs in
the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across
producers. Historically, various terms have evolved to make a distinction between the different commodities that are internation-
ally traded, for example: ‘traditional’ and ‘non-traditional’ commodities; ‘tropical’ and ‘non-tropical’ commodities. However, a more
useful distinction is probably between the ‘soft’ commodities and ‘hard’ commodities. For the purposes of this report, the emphasis
is essentially on the ‘soft’ and ‘hard’ commodities as recognized by UN Resolution 93 (IV) II of the Integrated Programme for Com-
modities (1976).1


Table A presents a range of soft commodities: mainly agricultural products such as cereals, tropical beverages, agricultural raw
materials, vegetable oils and oilseeds. The table also contains ‘hard’ commodities which denote products derived from mining and
other similar extractive industries, such as crude oil, bauxite, diamonds, gold and copper.


Soft commodities can also be categorized according to the region of production, tropical or temperate zone products; although
some products span both zones (e.g. rice and cotton). Table B. groups products by temperate and tropical zone depending on which
zone is the most important source of exports to the world market.


1 According to the resolution “the commodity coverage of the Integrated Programme should take into account the interests of
developing countries in bananas, bauxite, cocoa, coffee, copper, cotton and cotton yarns, hard fibers and products, iron ore, jute and
products, manganese, meat, phosphates, rubber, sugar, tea, tropical timber, tin and vegetable oils, including olive oil, and oilseed,
among others it being understood that other products could be included, in accordance with the procedure set out…”




xi


expLanatory notes


Table A. Primary commodities classification by categories


Primary sector Commodity categories Sub categories Examples of individual commodities


Hard commodities


Energy commodities


Petroleum products
Crude oil


Gasoline
Natural Gas


Coal


Renewables


Nuclear


Non-energy
commodities


Industrial metals


Aluminium


Copper


Zinc, Lead
Rare metals Plutonium, cobalt
Ferrous metals Iron ore


Precious metals
Gold, Silver


Platinum and palladium
Minerals Diamonds


Soft commodities


Livestock
Cattle, Dairy products,


Poultry, Pigs


Grains


Wheat


Maize, Rice


Soybeans,


Agricultural and industrial crops


Sugar


Timber


Cotton


Roots and tubers


Tea, coffee, cocoa


Vegetable oils


Fisheries Prawns, Cod, Tuna
Source: Adapted from Farooki and Kaplinsky, 2012.


Table B. Soft commodities grouped by temperate and tropical zone


Temperate Zone Sub-tropical and temperate zone products Tropical Products


• Citrus fruit
• Dairy products
• Hides & skins
• Maize
• Meat
• Non-tropical timber
• Nuts
• Oilseeds
• Potatoes
• Temperate zone fruit & vegetables
• Wheat
• Wine
• Wool


• Cotton
• Millet
• Rice
• Soybeans
• Tobacco


• Bananas
• Cocoa
• Coffee
• Hard fibers
• Jute
• Millet and sorghum
• Palm oil
• Pineapples
• Rice
• Rubber
• Spices
• Sugar
• Tea
• Tropical timber




xii


COMMODITIES AND DEVELOPMENT REPORT


glossAry of terms


• Backwardation and contango: If the market is in backwardation, it means that the futures price of contracts with
later maturity dates is lower than the price of futures in the nearby maturities. In this case, positive yields are earned in the
roll period, as the price of the current futures contract (which is sold) will be higher than the next futures contract (which is
then bought). Conversely, in a contango market, negative yields are earned in the roll period.


• commodity index investment: an activity typically characterized by a passive strategy designed to gain exposure
to commodity price movements as part of a portfolio diversification strategy. Exposure to commodity price movements
can be based on investment in a broad index of commodities, a sub-index of related commodities, or a single-commodity
index.


• commodity index traders (cIts): these are institutional investors engaged in commodities futures trading strate-
gies that seek to replicate one of the major commodities indices by following that index’s methodology. They buy exposure
to commodities in futures markets and maintain their position through pre-specified rolling strategies - buy and hold.


• derivatives: are types of investments where the investor does not own the underlying asset, but makes a bet on the
direction of the price movement of the underlying asset via an agreement with another party. There are many different
types of derivative instruments, including options, swaps, futures and forward contracts. Derivatives have numerous uses
as well as various risks associated with them, but are generally considered an alternative way to participate in the market.


• excessive speculation: amount of speculation beyond that which is necessary or normal relative to hedging needs.


• exchange: a central marketplace with established rules and regulations where buyers and sellers trade futures and op-
tions contracts or securities.


• Futures contract: an agreement to purchase or sell a commodity for delivery in the future: (i) at a price that is deter-
mined at initiation of the contract; (ii) that obligates each party to the contract to fulfill the contract at the specified price;
(iii) that is used to assume or shift price risk; and (iv) that may be satisfied by delivery.


• Hedger: a trader takes a position in a futures market that is opposite to positions held in the cash market to minimize the
risk of financial loss from an adverse price change; or who purchases or sells futures as a temporary substitute for a cash
transaction that will occur later. Hedging can take the form of either a long cash market position (e.g. with ownership of the
cash commodity) or a short cash market position (e.g. plan to buy the cash commodity in the future).


• Long Hedge: a hedging transaction in which futures contracts are bought to protect against possible increases in the
cost of commodities.


• Long: (1) one who has bought a futures contract to establish a market position; (2) a market position that obligates the
holder to take delivery; (3) one who owns an inventory of commodities.


• A money manager: is a registered commodity trading adviser (CTA), a registered commodity pool operator (CPO), or
an unregistered fund identified by the Commodity Futures Trading Commission (CFTC). Money managers are engaged in
managing and conducting organized futures trading on behalf of clients.


• option: a contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity
or other instrument at a specific price within a specified period of time, regardless of the market price of that commodity /
instrument.


• over-the-counter trading (otc): the trading of commodities, contracts or other instruments not listed on any
exchange.


• roll period: Commodity futures contracts typically specify a delivery date for the underlying physical commodity. As this
date approaches, investors may replace the contracts having near-term expirations with contracts having more-distant
expirations. This process is known as “rolling.” For example, a coffee futures contract bought and held in September may
specify a December expiration date. As the expiration date approaches, the contract expiring in December may be replaced




xiii


gLossary oF terms


by a contract for delivery in February. For the S&P Goldman Sachs Commodity Index the hedge roll period is defined as
the fifth through ninth business days of a month. During this five-day “roll period,” the index mechanically rolls from one
contract to the next at a uniform rate.


• short Hedge: selling futures contracts to protect against possible decreased prices of commodities.


• short: (1) the selling side of an open futures contract; (2) a trader whose net position in the futures market shows an
excess of open sales over open purchases (see Long).


• speculative bubble: a rapid increase in prices caused by excessive buying that is unrelated to any of the basic, under-
lying factors affecting the supply or demand for a commodity or other asset. Speculative bubbles are usually associated with
a “bandwagon” effect in which speculators rush to buy the commodity (in the case of futures, “to take positions”) before the
price trend ends, with an even greater rush to sell the commodity (unwind positions) when prices reverse.


• speculator: in commodity futures, a trader who does not hedge, but who trades with the objective of achieving profits
through the successful anticipation of price movements.


• spot price: is the price that is quoted to buy a commodity today. Similarly, a spot commodity is a commodity traded on
the spot market with the expectation of actual delivery, as opposed to a commodity future that is usually not delivered.


• traders: In the futures market, The US Commodity Futures Trading Commission identifies three types of traders:
1) commercial traders or hedgers who use futures to reduce the risk of future unfavorable changes in the price of commodi-
ties that they handle; 2) non-commercial traders or speculators who aim to benefit from future price movements; and, 3)
arbitrageurs who attempt to profit by locking into more than one market.


• Volume and open interest: volume represents the total amount of trading activity or contracts that have changed
hands in a given commodity market during a single trading day. The greater the amount of trading during a market session,
the higher will be the trading volume. Open Interest is the total number of outstanding futures contracts that are held by
market participants at the end of each day. It is the total number of futures contracts, long or short, in a market that has been
entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Where volume measures the pressure
or intensity behind a price trend, open interest measures the flow of money into the futures market.




xiv


COMMODITIES AND DEVELOPMENT REPORT


AbbreviAtioNs
AMIS Agricultural Market Information System
APTERR ASEAN Plus Three Emergency Rice Reserve
ASEAN Association of Southeast Asian Nations
BRICS Brazil, Russian Federation, India, China and South Africa (group of emerging countries)
CDDC commodity-dependent developing country
CFTC Commodity Futures Trading Commission
CPI consumer price index
ECOWAS Economic Community of West African States
EU European Union
FAO Food and Agriculture Organization of the United Nations
FDI foreign direct investment
G20 Group of 20
GDP gross domestic product
GHG greenhouse gas
GNI gross national income
GVC global value chain
HIPC Heavily Indebted Poor Countries (initiative)
ICA international commodity agreement
IFI international financial institution
IFPRI International Food Policy Research Institute
IMF International Monetary Fund
ITC International Trade Centre of UNCTAD/WTO
LDC least developed country
LIFDC low-income food-deficit country
MDG Millennium Development Goal
MEP minimum export price
NBTT net barter terms of trade
NEPAD New Partnership for Africa’s Development
NFIDC net food-importing developing country
ODA official development assistance
OECD Organisation for Economic Co-operation and Development
OPEC Organization of the Petroleum Exporting Countries
OTC over the counter
R&D research and development
REER real effective exchange rate
SAARC South Asian Association for Regional Cooperation
SADC Southern African Development Community
SAP structural adjustment programme
SITC Standard International Trade Classification
SWF sovereign wealth fund
TNC transnational corporation
UNCTAD United Nations Conference on Trade and Development
UNFCCC United Nations Framework Convention on Climate Change
USDA United States Department of Agriculture
WDI World Development Indicators (of the World Bank)
WFP World Food Programme
WTO World Trade Organization




xv


oVerVIew


overview


1. INTRODuCTION
The commodities sector remains an essential source of em-
ployment, income and government revenues for most develop-
ing countries. The aim of this Commodities and Development
Report is to consider the factors that have shaped this sector in
recent years and in particular, the implications of the commod-
ity boom of 2003–2008 for commodity-dependent developing
countries (CDDCs)1. The Report stresses that to the extent these
countries have gained from the commodities price boom, in
terms of foreign exchange earnings, increased capital flows
and a growth spurt, positive spillovers to other sectors of their
economies have often been limited.


There have undoubtedly been structural shifts on both the
demand and supply sides of a number of commodity markets
which are likely to have a lasting effect on prices. However
the recent volatility of prices has also been heavily influenced
by the financialization of many commodity markets and by the
strategic decisions of commodity transnational corporations
(TNCs), including in the context of global commodity value
chains. Thus whilst there remains an important role for domes-
tic policy in both the macroeconomic management of capital
inflows and the organization of their supply chains, there is a
clear need to focus on the role played by international financial
markets if CDDCs are to reap their share of the gains of the
commodities boom.


Much of the policy dialogue on economic management of the
resource sector is still framed by the experience of the sec-
ond half of the twentieth century. However, more recent fac-
tors suggest the need to reframe this policy agenda. These
include strong resource-intensive growth in larger developing
countries such as China and India, the growing asymmetry
between more concentrated buyer power and reduced pro-
ducer power in many agricultural commodities2, the growing
influence of standards in many commodity value chains which
disadvantage small-scale producers and reinforce the power
of leading international firms, changes in corporate strategy in
many minerals and metals commodities with large producing
firms actively seeking local suppliers, and climate change and
growing demand for biofuels. All of these factors call for a new
approach towards policy in resource-intensive countries, ad-
dressing not only domestic conditions and policies but also the
organization of global exchanges and financial markets. Thus,
the time is ripe for a review of the “commodity problem” and for
developing new explanatory frameworks that could help pro-
vide a better understanding of the challenges facing developing
countries that depend on the commodities sector to attain their
development objectives.


The ongoing commodity price boom provides an opportunity
for commodity-exporting developing countries to embark on
a sustainable growth path. But to achieve this objective they
need to gain a larger share of the price windfall and to adopt
investment strategies that enhance the diversification of their


economies as a basis for self-sustaining development, re-
sulting in increased employment and rising incomes for all.
However, major impediments to this process persist. These
include the unequal distribution of resource rents, high com-
modity price volatility, and food and energy insecurity. Without
appropriate policy responses, a significant improvement in the
terms of trade of CDDCs may entrench their existing commod-
ity dependence by drawing additional resources into the com-
modity export sector and away from other important activities.
Moreover, it is uncertain how long the commodity boom will
last, which makes medium-term savings and investment deci-
sions critical to the formulation of development policy.


Particular developmental challenges arise in the agricultural
sectors, where although exporters have benefited from high
commodity prices since 2003, many of these developing coun-
tries are at the same time net importers of food and/or energy,
and have therefore not fully benefited from the high prices.
Even where countries may be self-sufficient in food production,
many small farmers (approximately 50 per cent in sub-Saharan
Africa and in South Asia) are in food deficit and stand to lose
from rising prices of agricultural commodities.


The dependence of many commodity producing economies on
a few primary products has remained unchanged and perpetu-
ates a commodity-dependent poverty trap, which makes it dif-
ficult for low-income countries to achieve long-term growth,
in particular through an industrial growth strategy, which is an
essential means of escape from poverty. The export of factors
such as low productivity, low value added primary products
(that is, commodities) extracted with few linkages to the local
economy are often endogenous to the poverty trap. Moreover,
with China being a major importer of raw commodities from
other developing countries that it uses as inputs in its manufac-
tures for export to developed countries, there is a risk that this
deepening trade relationship with China may further entrench
CDDCs in the low end of the international division of labour.


There are at least three key features of today’s commodity
markets that threaten to keep commodity-dependent coun-
tries stuck in a poverty trap despite their recent growth spurts.
First is the unpredictability and increased volatility of interna-
tional prices. This volatility has become an intrinsic feature of
commodity markets – a feature which was amplified during
the 2003–2008 commodity boom as a result of the grow-
ing linkages between commodity and financial markets, with
commodities increasingly traded as financial assets. Second,
the belief that, over the long term, prices of commodities fall
in relation to prices of finished goods or higher value-added
goods (the Prebisch–Singer theory of the secular decline of
commodity prices), has meant that many CDDCs have failed
to “make the most of commodities”. That is, they have failed
to adopt policies which allow them to maximize the linkages
to other sectors. This is one of the key factors explaining the
weak long-term growth performance of many poor countries,
and particularly the least developed.




xvi


COMMODITIES AND DEVELOPMENT REPORT


Third, there is a tendency towards greater concentration of
international commodity production and trade in global value
chains dominated by TNCs. Sometimes this dominance is re-
flected in equity control over productive assets in commodity
producing economies, but it is more common for commod-
ity producers (particularly in agricultural commodities) to be
locked into buyer driven chains which are controlled by global
retailers and category buyers. Globally, there is a growing con-
centration of trade and vertical integration of large firms (for
example, TNCs and supermarket chains). For example, four
TNCs control over 60 per cent of the global coffee market, while
three control 85 per cent of the world’s tea market. Financial
institutions (for example, banks and hedge funds) are also in-
creasingly becoming players in physical commodity markets
across the range of agricultural, hard and energy commodities.
Mergers and acquisitions have led to dramatic reductions in
the number of firms having significant market shares of com-
modities such as cocoa, vegetable oils, grains and bauxite. In
many of the poorest CDDCs, the ability of international trade
to act as an engine of growth and poverty reduction is being
short-circuited by the high volatility of world commodity prices
and by the organization of global value chains.


The fact that the majority of CDDCs are locked into a trading
structure that in the past has subjected them to secular terms-
of-trade losses and volatile foreign exchange earnings severely
encumbers their effective macroeconomic management. It also
stunts capital formation, hampering their efforts to diversify
into more productive activities while adding to their debt over-
hang. The persistence of the so-called commodity problem due
to the CDDCs’ dwindling capacity to withstand large commodity
shocks effectively causes them to bear a disproportionate share
of the global adjustment costs of commodity market volatility.
It is a situation that has strong economy-wide ramifications for
CDDCs, and is likely to be a major factor hindering their efforts
to reduce their vulnerability to external shocks, particularly due
to their failure to build greater resilience.


Thus, the organization of global commodity value chains has
major implications for domestic policy in CDDCs on a range of
fronts. Since many of these policy constraints are determined
by factors exogenous to individual commodity-dependent
economies, this highlights the need to address the function-
ing of these commodity markets at the global level. But it is
not only for the sake of the CDDCs that these issues need
to be addressed. Many resource exporting economies which
have gained from the commodities price boom have become
increasingly important sources of demand for the exports of
higher income and non commodity dependent economies. The
persistence of their poverty poses a threat to an already fragile
global economic recovery.


International financial institutions have constantly objected to
establishing appropriately structured global mechanisms for
the improved functioning of global commodity markets. How-
ever, it behoves the international community to assume its
share of responsibility in the light of the Millennium Develop-
ment Goals (MDGs) by supporting a coherent policy framework
to bolster CDDCs’ own efforts at economic restructuring and
diversification. It is now necessary to move beyond debate, and


to undertake concerted action and policies at the international
level to stabilize commodity prices.


The broad aim of this Commodities and Development Report
is to reconsider received policies on the management of com-
modities production in CDDCs and on the operation of global
trading markets and value chains in the light of the commod-
ity boom of 2003–2008. The commodities price boom clearly
contributed to high growth rates in most commodity-exporting
countries. This was a result of an increase in the value of ex-
ports, (a positive direct effect). But it also arose as a conse-
quence of a series of indirect effects. For some countries, the
boom attracted foreign direct investment (FDI) and other capi-
tal inflows, spilled over into domestic financial development,
it increased trade between neighbouring economies, and in-
creased production and incomes in the commodities sectors
led to Keynesian demand multipliers in the domestic economy.
Beyond the impact on CDDCs, the commodity price boom also
contributed to growth in neighbouring economies boosting their
demand for commodities.


On the other hand, there have also been negative direct effects
on many low-income countries, particularly those which are
net food importers: the rising prices of food and fuel doubled
their import bills for these commodities, increased domestic
food prices and poverty, and in some instances fuelled so-
cial unrest and riots. They may also have inhibited economic
development and diversification via Dutch disease and other
“resource curse” effects, and increased the volatility of com-
modity prices by attracting speculative investment, all of which
are negative indirect effects.


This Report attempts to place in perspective the persistence
of many perennial problems faced by commodity producing
economies in the context of changing demand and supply con-
ditions by addressing the following issues:


• Is the commodity problem still relevant to today’s develop-
ment challenges?


• To what extent has the ongoing commodity boom yielded
sustainable economic development for CDDCs?


• What enduring issues and new twists have influenced the
way CDDCs translate the commodities price boom into du-
rable development and growth?


The Report also examines various international and national
policy measures that may facilitate sustainable development
in CDDCs. In particular, it seeks to address the following issues:


• Introduce specific measures designed to promote food se-
curity;


• Prepare for the possibility of lower commodity prices and a
consequent decline in commodity export earnings, govern-
ment revenues and economic demand;


• Strengthen existing or create new regional economic blocs
and preferential trade arrangements to reduce vulnerability
to global shocks and an excessive dependence on com-
modities;




xvii


• Harness the windfall revenues from higher commodity prices
to facilitate wider economic transformations in order to boost
economic growth that is not driven by commodities alone.


An evidence-based assessment of these questions is provided
by tracing the direct and indirect effects of the commodities
boom through a review of the available empirical literature on
the issues at stake, and by analysis of a data set constructed
specifically for this purpose. Distinctions are made between
commodity-dependent and other developing countries, be-
tween food and non-food commodity-dependent economies,
and between net food importers and exporters.


The Report notes that commodity markets are increasingly
dominated by lead TNCs coordinating global value chains and
by financial investors. This has important implications for coun-
tries pursuing an export-led development model. This situation in
commodity markets is in line with a more general change in the
nature of globalization from being based on a productivity-driven
model to a finance-driven one. A major impact of this change
has been that CDDC governments have used export earnings to
repay their foreign debt, set up sovereign wealth funds (SWFs)
and build their foreign exchange reserves. While these foreign
capital transactions are important in demonstrating solvency and
stability to foreign investors, they do not automatically contribute
to the real sectors of these economies, at least in the short term.


The experience of CDDCs represents a deviation from the ex-
port-led development model of some successful East Asian and
South-East Asian economies, whose governments reinvested
earnings from exports of oil or agricultural products in industrial
or infrastructure projects or in domestic capital markets in order
to diversify their economies, improve productivity and increase
available capital. The Report argues that one way to make the
most of windfall incomes from commodities would be to adopt
a development approach which makes the most of commodi-
ties and ensures that those incomes are used to help alleviate
domestic supply constraints, including the financing of produc-
tivity-increasing investments. An appropriate macroeconomic
policy framework would ensure that such investments promote
structural transformation, including economic diversification, and
in turn unleash the foreign exchange earnings potential of their
economies to foster sustainable growth and development. This
should be supported by an improved governance architecture
for international commodities shaped by representatives of all
developing countries, including the G77, and not just the G20.
Beyond macroeconomic policies, domestic policies designed to
make the most of commodities also need to explicitly target the
productive linkages needed to encourage economic diversifica-
tion and this may involve the introduction of industrial and in-
novation policies that had in previous decades been undermined
through the implementation of structural adjustment policies.


2. ThE “COMMODITy PRObLEM” IN
ThE CuRRENT CONTExT


The Prebisch–Singer hypothesis, developed in the United Na-
tions during the 1950s, cast doubt on the prevailing conven-
tional wisdom that commodity prices rise at a greater rate than
those of manufactures. Prebisch and Singer sought to under-


stand how an overdependence on commodity exports affected
the development prospects of countries in Asia, Latin America
and colonial Africa, having observed that underdevelopment
and poverty persisted in these regions in the aftermath of the
Second World War. Singer added a further concern with what
he observed was the inherently enclave nature of commod-
ity extraction in minerals and metals, and oil and gas, thereby
limiting spillover effects.


In their analyses of historical data aimed at identifying the
long-term trend in the terms of trade (that is, the ratio of com-
modity prices to prices of manufactures), Prebisch and Singer
noted that from the latter part of the nineteenth century to the
eve of the Second World War there had been a secular decline
in the prices of primary goods relative to the prices of manu-
factured goods. This was identified as the major development
problem facing CDDCs, as it meant limiting the supply of
foreign exchange and finance required to fund development,
hence obstructing policies designed to industrialize, and thus
creating the danger of a permanent state of underdevelop-
ment. This is a process that we have now come to understand
as “the poverty trap”. This came to be perceived in the 1960s
and 1970s as the core of the commodity problem in the con-
text of the quest for economic growth and development by
CDDCs.


Historically, commodity price cycles involved a short, rapid
price increase, followed by a steep fall, and then a long period
of stagnation before the next spike. Moreover, even during
periods of commodity price spikes, this seldom affected the
full range of commodities. By contrast, the current boom has
been characterized by relatively sustained price increases
since 2003 across a wide range of commodities interrupted
only very briefly, though significantly, in 2009.


Since the mid-twentieth century, there have been only two
previous major commodity booms, which occurred during
the early 1950s and early 1970s. The short-lived commod-
ity price booms of the 1950s and 1970s were based on a
combination of temporary interruptions to supply (anticipated
threats to supply due to the Korean war in the 1950s and the
actions of OPEC in the 1970s) and unrealistic expectations of
a sustained growth in demand. But neither of these circum-
stances endured.


By contrast, the post-2002 commodity price boom has re-
sulted from a combination of events which make it likely
that prices will remain high and in many cases grow for
some years to come. Unlike the 1970s, the expectation of
rapid demand growth is not an illusion since the resource-
intensity of growth in China, India and other developing
economies is high. Heavy investments in infrastructure, rap-
id growth in manufacturing, a switch in food consumption
from vegetable foodstuffs to (land-intensive) pork and beef
are likely to be sustained. Moreover, the growing demand
for biofuels could also persist with the concerns around a
warming world. On the supply side, most of the low-cost
sources of minerals and metals, and oil and gas (notwith-
standing the shale revolution) have already been tapped,
and expanded production of agricultural commodities is


oVerVIew




xviii


COMMODITIES AND DEVELOPMENT REPORT


likely to be disrupted by climate change and climate vari-
ability, to which must be added a slowdown in agricultural
productivity growth and the need for very large scale and
costly investments in irrigation.


An important common feature of the price booms of the
1970s and after 2002 is that they coincided with periods of
real depreciation of the United States dollar and low global
interest rates. In the 1970s, the breakdown of the Bretton
Woods system of fixed exchange rates permitted substantial
monetary expansion in the United States of America. This was
associated with a real depreciation of the dollar by 50 per
cent between 1971 and 1980 and a lowering of global real
interest rates. Similarly, between 2001 and 2010, the dollar
depreciated by 26 per cent but this was unable to prevent
a growing United States trade deficit that was financed by
significant capital inflows from emerging countries. These in-
flows provided a source of cheap capital and have helped to
maintain low interest rates that (first lowered by action from
the US Federal Reserve following the 2001 economic slow-
down) put pressure on commodity prices.


One of the channels through which low interest rates lead
to higher commodity prices is linked to the search for higher
yields by the holders of United States Treasury bills (T-bills).
Indeed, as T-bills can be used as collateral against futures
positions, according to the United States Commodity Futures
Trading Commission, investors can earn interest on the T-bills
while simultaneously speculating on commodity prices. This
behaviour has been stimulated by some of the large invest-
ment banks and brokers/dealers that are involved in open
market operations with the Federal Reserve in the context of
monetary expansion. These investors seek higher returns than
T-bills alone can yield when interest rates are low. Lending to
investors involved in equity and commodity index funds is less
risky than lending to non-financial firms or consumers. Since
investment in commodity index funds is heavily concentrated
on the buy (long) side of the commodities futures market, this
substantial influx of investment gives rise to futures price bub-
bles. These in turn affect spot prices by altering price expecta-
tions and providing incentives to hoard – a phenomenon that
could largely explain the synchronized increase in equities and
commodity prices since 2008.


The real depreciation of the dollar contributed to the upward
pressure on commodity prices. As commodities are generally
priced in dollars, depreciation of the dollar increases the pur-
chasing power of non-United States buyers. It also reduces the
relative returns on dollar-denominated financial assets. Hence
it made commodities more attractive as an asset class for in-
vestment, fuelling speculative behaviour in commodity mar-
kets. Dollar depreciation further leads to monetary expansion
in countries whose currencies are pegged to the dollar. Since
1960, it is only during periods when supplies have been limited
– in the 1970s and during the past decade – that there has
been a significant positive correlation between dollar exchange
rates and commodity prices. Empirical analysis shows that ex-
change rate effects are particularly significant for oil, gold and
some metals such as aluminium and copper. At the same time,
the benefits accruing to producing countries have not been as


great as suggested by the increase in dollar prices, since the
purchasing power of the dollar has, as noted, declined.


The historically high price levels of many commodities in recent
years may have increased the revenues of several commodity-
exporting countries, but they have not alleviated the deeper
development challenges faced by them. Price volatility has in-
creased in the past decade, most tellingly illustrated by a price
peak in 2008, followed by a crash in early 2009 and a rapid re-
bound in the two subsequent years. This price instability, com-
bined with the pervasive financialization of commodity markets,
especially since 2000, has brought the commodity problem to
the forefront of the development agenda after decades of rela-
tive neglect. Consideration of this problem today must take into
account not only the breadth of theoretical work on this issue,
but also the current global economic context, which is marked
by major changes occurring in the global balance of economic
power, the increasing financialization of commodity markets,
the growing role of TNCs in these markets, a better understand-
ing of the structural economic vulnerability of least developed
countries (LDCs), and greater accessibility and diversity of risk
mitigation instruments.


Commodities: blessing or bane?
In some early models of economic development, it was
thought that developing countries, could use their relatively
abundant land and labour endowments to mobilize the re-
sources needed to pursue economic diversification and
growth. In particular, it was believed that countries could
benefit from agricultural production, notably by developing
linkages to low-technology manufacturing sectors such as
the production of agricultural inputs and building capabilities
to process primary products.


While these strong linkages of primary production with the
rest of the economy are important for domestic agriculture,
historically they may not necessarily have been relevant for
commodity exports. In addition, there have been important
structural and financial drawbacks to development based on
commodity exports. Historically, the structural dependence on
primary-sector earnings may have hampered the economic
diversification that is a prerequisite for long-term economic
growth and development. The terms of trade of non-oil-
exporting developing countries have generally resulted in
a deterioration of revenues until recently, and it is not clear
whether the recent commodity boom represents a durable
change in this trend.


Moreover, to the extent that commodity exports provided sub-
stantial foreign exchange earnings, the consequence for some
producing economies was an appreciation in the real exchange
rate, which had the effect of disadvantaging other traded goods
sectors (the Dutch disease effect). Inflows of finance that were
not “sterilized” also contributed to inflationary pressures in
some of the poorest CDDCs, which reinforced the harmful im-
pact on non-commodity sectors. Furthermore, for CDDCs, the
desired policy response to declining terms of trade, of moving
up the commodity value chain and diversifying into manufac-
turing, has become more difficult as commodity value chains




xix


have become more concentrated. The greater control exercised
by processors, traders, and retailers has effectively curtailed
CDDCs’ policy space and limited their ability to participate in
global value chains at levels that would guarantee them more
equitable shares in the profits. CDDCs have generally struggled
to use commodity revenues to promote structural change and
sustainable development (through investments in productive
capacity building, including in infrastructure) and poverty re-
duction (through increasing social expenditure).


A further feature of commodity markets since the mid 1990s,
especially affecting agricultural commodities, has been the
growing pressure towards certification, standards and trace-
ability in exports destined for high income markets. In many
of these markets, retailing is highly concentrated (the median
share of the five largest retailers in European economies in
2003 was more than 80 per cent). These high profile firms are
vulnerable to scares over the provenance of what they sell, and
require very intensive levels of documentation and standards
compliance. This has been reinforced by policies such as the
European Union’s farm-to-fork guidelines. There have been two
consequences of these standards-intensive chains. First, the
introduction and monitoring of standards has been an impor-
tant vector for learning by developing country producers. But
second, the capacity to meet standards has often tended to
be confined to large scale and formal sector producers, thus
excluding many small and poor producers from global value
chains.


Finally, many CDDCs have not been able to appropriate the full
gains from rising commodity prices. To the extent that com-
modity prices are determined by supply and demand, the mar-
ket price of the commodity will be determined by the produc-
tion costs of the least efficient producer. This provides major
resource rents to low cost suppliers, but few resource rents to
new suppliers. Given the high cost structure of extracting com-
modities in new producers – increasingly in CDDCs which have
poor infrastructure and are often fragile states – the real level
of resource rents available may be considerably lower than
those suggested by rising commodity prices. Moreover, many
CDDCs have had major difficulties in appropriating what rents
are available, in many cases as a result of the special deals
with commodity TNCs which were contracted during the period
of structural adjustment.


It is sometimes argued that as a consequence of these various
factors, natural-resource-rich countries are inherently slower
growing than resource-poor countries. This has been dubbed
the natural resource curse. This notwithstanding, it is important
to note that many of the described channels are not, as the
term “curse” might suggest, intrinsic to commodity production.
Rather, they are problems that can be eliminated or alleviated
through appropriate macroeconomic and sectoral policies. If
the revenue generated by commodity exports can be allocated
in such a way that macroeconomic stability is maintained and
that the other sectors of the economy benefit rather than suf-
fer, and that they contribute to the diversification and enhance-
ment of productive capacities, natural resources can become a
blessing rather than a curse.


3. NEw TwISTS TO PERENNIAL
COMMODITy PRObLEMS


The recent episode of high commodity prices has improved
the revenues of most commodity-exporting developing coun-
tries. Conventional responses to this increase in revenues have
emphasized good governance and appropriate policies for the
efficient allocation of the revenues (for example, investment in
productive capacities) and management of the potential mac-
roeconomic risks (for example, sterilizing commodity windfall
income). These responses have minimized some of the nega-
tive features (for example, the Dutch disease) that can accom-
pany a revenue windfall. However, several new elements have
complicated the management of the commodity sector.


The first of these new factors is the impact of growing demand
from latecomer economies in East and South Asia in the context
of a slowdown of growth in traditional high income economies.
The rapid development of China’s export-oriented manufacturing,
which has focused on electronics, and textile products has fuelled
demand for industrial metals, cotton and wool. Its rapid economic
growth has also been accompanied by large investments in in-
frastructure that make heavy demands on minerals, metals and
energy. Rapid income growth and changing food consumption pat-
terns, with increasing spending on meat and fish products have led
to higher demand for cereals as animal feedstock. Indeed, this Re-
port shows that China’s demand (from a relatively low base) during
the period 1995–2010 accounted for a growing share of global
demand for a number of commodities compared with other major
economies. However, given that Chinese demand for many other
commodities (for example, wheat and maize) have been coun-
tercyclical to those of the United States, it is unlikely that China
contributed significantly to boosting the prices of all commodities.


Major developing economies (such as China and India) have
also begun to have an impact on global commodity value
chains in two important respects. The shift in exports from
northern markets to final markets in China, India and other
developing economies (a phenomenon experienced in many
agricultural commodity producers) has diminished the impor-
tance of standards and compliance in value chains. This has
often had harmful impacts on the environment (for example,
in the logging sector) and has reduced one of the conduits
for learning in CDDCs. But at the same time it has provided a
greater space for small scale and informal sector producers to
participate in commodity export sectors. The second emerging
impact of these shifting markets has been a tendency to reduce
forward processing in many value chains. Many buyers in high
income markets had been content to allow some limited for-
ward processing to take place in commodity producing coun-
tries, particularly where this involved environmentally sensitive
and labour intensive processes.


A further dynamic factor which has assumed growing impor-
tance in commodity markets, and seems set to continue exert-
ing a strong influence, is the financialization of these markets.
Indeed, the rise in commodity prices since 2003 has been ac-
companied by the increasing presence of financial investors
in commodities futures markets. Financial investors differ from
producers or traders in that they are not concerned with the


oVerVIew




xx


COMMODITIES AND DEVELOPMENT REPORT


physical delivery of products, but rather invest in commodities
for portfolio diversification. As these financial investors pulled
their funds out of troubled bond and equity markets, the num-
ber of commodity futures contracts traded worldwide and the
value of the commodity derivatives trade, including both futures
and options, rose dramatically between 2003 and 2010.


This financialization of commodity futures, which is a symptom
of a broader trend of growth of markets for financial assets
and wealth, has brought about a fundamental change in the
conduct and outcomes of commodity markets in general. In a
much broader context of finance-driven globalization, devel-
oping-country governments have been encouraged to accu-
mulate foreign assets (official reserves and sovereign wealth
funds) as buffers against increased financial instability at the
expense of growth of output and productivity.


A growing feature in this pattern of financialization of markets
is the fast growing role of TNCs in global commodities trade,
including huge commodity trading companies and financial in-
stitutions. This has resulted in an increase in market concentra-
tion and has been associated with growing oligopolistic/market
power, which may be responsible for creating price distortions
in several commodity markets. This development has not been
without costs to commodity producers or companies in most
developing countries, as they lack the necessary financial mus-
cle and expertise to compete on an equal footing with TNCs.


An additional, albeit incipient, new and little-noticed dynamic
affecting the commodities sector is the changing attitude of
commodity producing firms to acquiring inputs locally. As ob-
served earlier, one of the primary contributions of Singer to our
understanding of the commodities sector was the enclave na-
ture of production, leading to few spillovers to the local economy.
However, from the mid-1990s industrial production has been
characterized by a growing fragmentation through the spread of
global value chains as firms seek to concentrate on their core
competences. At the same time, the demand for flexibility and
low inventories has placed a premium on locally based suppliers.
This approach to outsourcing and local supply has also begun to
affect the resource sector in recent years, particularly in minerals
and metals and in energy sectors and provides new opportunities
for backward linkages and for creating synergies between the
resource and industrial sectors. This was a dominant feature of
the growth of the industrial and commodities sectors as occurred
in the United States and Canada in the nineteenth century.


A final new development of note in the current commodities
boom is the increasing use of crops for biofuels. In the 2003/04
harvest year, 5 per cent of maize crops were used for the pro-
duction of ethanol, which is mixed with gasoline and marketed
as an alternative to fossil fuel. This proportion had tripled to
15 per cent by the 2010/11 harvest year. Generous subsidy
programmes in the United States and Europe provided a major
inducement to farmers to use maize and sugar crops for the
production of biofuels instead of food. Competition from biofu-
els is estimated to have accounted for 15–20 per cent of the
increase in export prices of cereals. More fundamentally, bio-
fuels link cereal markets with energy markets, weakening the
strength of demand and supply signals on cereal prices.


4. POVERTy AND fOOD
INSECuRITy IN ThE MIDST A
COMMODITy bOOM


Beyond changes in the fundamental supply and demand of
commodities, the increase in financialization of commodity
markets and especially the large sums invested in futures mar-
kets have contributed to pushing up commodity prices. Indeed,
these factors have caused food prices to more than double
since 2006.


The rapidity and amplitude of price movements have harmed
many developing countries. Volatility is inherent in agricul-
tural commodity markets, as supply is largely dependent on
natural factors such as weather patterns that cannot be accu-
rately predicted, and neither demand nor supply can be eas-
ily or rapidly modified. The growing financialization of com-
modity markets adds a dimension to this inherent and often
climatically determined volatility. The presence of financial
actors in many cases smooths out small day-to-day varia-
tions in price, but exaggerates price swings during periods
of global crisis when the herding instinct of traders leads to
massive investments or flight from commodity markets, as
occurred in 2008. Several studies have concluded that com-
modity prices have exhibited higher volatility in the decade
since 2000. The period from 2006, in particular, has been
characterized by severe price volatility. High but unstable
prices can have negative impacts on developing countries,
be they net exporters or net importers of commodities. Sharp
price increases of imports exacerbate inflationary pressures
and current account imbalances in net importing countries.
And strongly fluctuating prices undermine macroeconomic
management in net commodity-exporting countries as they
increase the difficulties of financial planning and discourage
investment due to growing uncertainty.


High and unpredictable food prices have adversely affected health
and social well-being in many of the poorest areas of the world.
Rapid price hikes during the period 2007–2008 and over the
course of 2011 led to episodes of public unrest and riots in more
than 30 developing countries. It is estimated that an additional 44
million people have fallen below the $1.25-per-day poverty line as
a result of higher food prices since June 2010, which represents a
severe blow to the attainment of MDG 1 by 2015.


Sharp rises in food prices place a heavy burden on poor house-
holds, in particular, as they spend the largest proportion of their
incomes on food. It can translate directly into undernourish-
ment, reduced expenditure on health and education, and a loss
of capacity to earn a living. Nonetheless, it should be noted
that domestic price movements in developing countries do not
necessarily follow international price movements. Indeed, food
subsidy policies, variations in transport and storage costs, and
variations in profit margins of food value chains are among the
factors that result in an incomplete pass-through of interna-
tional prices to domestic food prices. Using domestic food pric-
es to assess the poverty impacts of rising food prices reveals
that, although there are large regional variations, the negative
impact on consumption clearly outweighs any positive income
effects that have accrued to producers, in part because most




xxi


of them are net food buyers – approximately half of all sub-
Sahara African and Indian farms are in food deficit. Similarly,
it appears that the ability of developing countries to respond
to higher food prices by expanding production has been insuf-
ficient to offset the negative price effects, given the low invest-
ments in the sector over the past couple of decades.


For CDDCs, the direct impacts of rising commodity prices be-
tween 2003 and 2011 have varied widely according to the
composition of the exports and imports of individual countries.
Some CDDCs, especially those that are net fuel and food ex-
porters, saw their terms of trade improve in the six years lead-
ing to 2008. However, several other CDDCs, including some of
the poorest countries, suffered a deterioration in their terms of
trade. Although they export other primary commodities, many
of the latter group of CDDCs are net food and fuel importers.
For some of them, the increase in the prices of the tropical
agricultural products that constitute the bulk of their exports
was not sufficient to compensate for the increase in the import
costs of food and fuel. The concrete outcome for these CDDCs
has been a severely worsening trade balance while their popu-
lations have suffered from the higher costs of food, thereby
increasing the incidence of food insecurity.


Deficiency of current food security strategies
necessitates reconsideration of emergency food
reserves
The food crisis of 2008 exposed weaknesses in the interna-
tional food system with disproportionate effects on the world’s
poor and malnourished populations. The response of some
national governments to rising prices exacerbated the effects
of the crisis. Notably, the unilateral decisions of many food-
exporting countries to restrict their exports compounded the
threat of high food prices by raising fears of limited physical
access to essential foodstuffs. This had adverse consequences
for both net exporters and importers of food commodities. For
food-exporting countries, the protectionist measures delayed
the transmission of higher food prices to consumers, leading to
large hikes in price inflation when the measures were repealed.
For food-importing countries, restricted supplies and skyrock-
eting prices resulted in severe fiscal imbalances and, in some
cases, to food shortages.


The experience of the 2008 food crisis has led policymakers to
search for mechanisms to better address and cope with future
crises in the context of the changed international food system.
The crisis clearly demonstrated that food security strategies
based on a combination of spot market food purchases and
financial reserves have been insufficient and unsustainable
for poorer countries. Furthermore, it has become clear that net
food-importing countries can no longer depend on internation-
al trade to meet their requirements during global food crises
without severely compromising their food security. Together,
these elements point to the need for some form of suprana-
tional grain reserve. Given regional specificities and logistical
constraints, it seems that a regional institution would be best
placed to provide cost-effective and responsive management
of such a multilateral grain reserve.


Several such initiatives are under way, notably in Asia and Af-
rica. Indeed, some forms of reserves have existed for several
decades. A review of the experiences of these various schemes
highlights four main challenges in establishing an effective
grain reserve: setting achievable objectives, finding the appro-
priate scale and components, identifying the right mix of com-
modities to stockpile, and aligning the interests of the different
members participating in the initiative/scheme.


In terms of objectives, grain reserves vary in ambition. Their
most basic aim is to stock essential food grains that will be
used to feed vulnerable populations during times of acute cri-
sis. Some grain reserves also aim to smooth consumption by
improving the distribution of food grains across time as well as
geographically, stocking grains at times and in places where
they are more plentiful and then distributing them at times and
places of relative scarcity. The most ambitious grain reserves
aim to stabilize prices through direct purchasing and selling
of grain to prevent volatility and price extremes. Naturally, the
more ambitious the scheme, the greater will be its operating
costs. In general, a food reserve for emergency supply pur-
poses is considerably cheaper to operate than a price stabiliza-
tion scheme. Furthermore, the track record of grain reserves in
terms of price stabilization has been mixed at best. The com-
plexity of price formation in commodity markets and the small
size of reserves relative to the market as a whole limit the abil-
ity of reserves to significantly affect price levels. Indeed, most
reserves with price stabilization objectives have failed within
a decade or two of their creation. In contrast, those designed
for use as emergency stocks have displayed a higher survival
rate in recent times. This suggests that emergency response is
a more feasible mandate for regional grain reserves. Should a
reserve initiative contemplate a price stabilization mandate, its
regular operating budget will need to be underwritten by emer-
gency funding facilities of sufficient size and responsiveness to
protect its defined price band.


A mix of components operating at different scales can offer
the best outcome for regional grain reserves. An independent
physical reserve equivalent to approximately 5 per cent of food
aid flows using existing national and local storage infrastruc-
ture and designed exclusively for emergency response could
help address the threat of malnutrition during food crises. At
the same time, a virtual reserve – that is, a notional commit-
ment to stabilize prices – could be used to limit price volatil-
ity on futures markets.3 The latter, being only notional, has the
advantage of incurring much lower costs than any intervention
through physical buffer stock management.


The commodity mix that is stockpiled by the regional grain re-
serve will naturally depend on the specificities of each region.
In East Asia, for example, rice is the only commodity used in
regional stockpiles, while in some African regions up to four
commodities are stockpiled. Stocking multiple commodities
increases the complexity of operations and reduces the econo-
mies of scale, as purchasing power is split among several
commodities. On the other hand, stocking multiple commodi-
ties also presents some opportunity for internal arbitrage, as it
offers the possibility to take advantage of varying price move-
ments of the different grains.


oVerVIew




xxii


COMMODITIES AND DEVELOPMENT REPORT


Aligning the different interests of the countries participating
in a regional food grain reserve is crucial to the success of
such a scheme. Clearly, the means and goals of participants
vary according to many factors, such as their relative wealth
and whether they are net importers or exporters of food grains.
While these varying interests pose a challenge in setting up
regional food grain reserves, they can also lead to synergies
among the members. Identifying and building upon such syner-
gies will be an important factor in the success of such reserves.


As these considerations demonstrate, there is no one-size-fits-
all blueprint for designing regional food reserves. The important
questions to resolve are where stocks should be located and
at what level they should be controlled. High-level policies and
schemes have the advantage of scale but can suffer from blind
spots at the local level and slow response times. A mix of differ-
ent instruments operating at different levels may represent the
best approach: stocks and storage could be primarily a matter
of national or subnational policy with regional reserves serving
as an important backstop.


5. LIMITED OVERALL IMPACT
Of ThE RECENT COMMODITy
PRICE bOOM ON COMMODITy-
DEPENDENT DEVELOPINg
COuNTRIES


Beyond the direct effects of poverty and food insecurity, there
are a number of indirect effects which capture the nature and
magnitude of the impact that the changes in commodity rev-
enues have had on various social and economic variables in
CDDCs.


Overall, there is some indication that, on average, increased
foreign exchange inflows from commodity export earnings
led on average to moderate income growth for CDDCs, but
with strong growth surges in some cases. Also, the non-com-
modity sectors of the economy do not seem to have been
adversely affected by the commodity price boom. In many
cases, both the industrial and services sectors exhibited fast-
er growth rates, albeit often from a low base as a result of
decades of structural adjustment programmes. Due to a much
higher growth rate of the primary sector, however, the shares
of these other sectors in GDP fell. As a result of these trends,
the commodity price boom does not appear to have promoted
much economic diversification during the period 2002–2009.
The industrial and innovation policies which might have pro-
moted this diversification have largely been precluded by the
legacy of structural adjustment policies introduced during the
1980s.


In order to establish to what extent these and other observable
trends in developing countries could be attributed to the ef-
fects of the commodity price boom, this Report has created a
measure of countries’ exposure to commodity revenue growth
based on the degree of commodity dependence and the ex-
tent to which a country is experiencing growth in commodity
revenues. This variable is termed commodity growth exposure.
Countries with very high commodity growth exposure include
oil and gas exporters such as Azerbaijan, Chad, Iraq and the


Sudan; countries with very low commodity growth exposure
include Bangladesh, Cambodia, China and the Philippines.  4
Generally, the price boom had a greater positive impact on
the poorer countries of the sample due to their less diversi-
fied economies and higher share of commodities in their total
exports.


Domestic financial development does not appear to have been
stimulated by the level of commodity growth exposure. Both
money and credit, as shares of GDP, have declined as com-
modity growth exposure has increased. This is also true for
stock market capitalization in those countries of the sample
for which this indicator is relevant. There is also little evidence
of exchange rate pressures that might be expected in a Dutch
disease scenario. This may be due to the build-up of foreign as-
sets and the decline of foreign liabilities as commodity inflows
were increasingly channelled to international financial markets
during the period 2003–2009.


Increased resource rents have not been translated
into productive investments in the domestic
economy
One of the striking features of the commodity price boom has
been the strong growth in commodity-exporting developing
countries’ foreign assets, especially in the form of official re-
serves, and in sovereign wealth funds. It is remarkable that
even low-income developing countries that have continued to
run current account deficits throughout the 2000s have been
increasing their reserves. This may have been an attempt to
follow the advice of donors and international financial institu-
tions to create buffers against the increased volatility of inter-
national financial markets.


Even during the boom years, most developing countries did not
move into positions of current account surplus – a finding that
is confirmed by other research. It also seems that the increased
revenue was not channelled towards building fixed capital for-
mation and upgrading productive capacity in order to enhance
productivity. Instead, it was used to accumulate financial assets
in both government and private accounts. As a result, reserves
rose tenfold in nominal terms between 1992–1997 and 2003–
2008. This accumulation of reserves should be regarded as a
net outflow of liquidity from the domestic economy. While such
reserves may serve as useful buffers against volatility, the op-
portunity costs in terms of foregone investment in fixed capital
or on spending on health and education and for real (domestic)
sector growth, and therefore development, could be substan-
tial. For example, production costs in Africa and other CDDCs
are raised by the high costs of infrastructure in which these
economies have experienced major problems in financing new
investments. The body responsible for promoting infrastructure
development in Africa, the Programme for Infrastructure Devel-
opment in Africa (PIDA) estimates that $68 billion is required
for regional infrastructure between 2012 and 2020, of which
only $38 billion is currently funded. The World Bank estimates
Africa’s needs for infrastructure development – both at national
and regional levels – as $93 billion per annum until it makes up
its infrastructural deficit.




xxiii


Further, it is striking that even during the commodity boom
years, commodity revenues were dwarfed by net external finan-
cial inflows, so that it was the capital account rather than the
current account that determined countries’ financial balance.
This means that for many countries the availability of finance
for investment and for maintaining financial stability is now de-
pendent on their ability to attract and retain capital flows that
include but go far beyond export revenues. This phenomenon is
in line with an observable shift in developing countries’ policy
emphasis from real-sector investment for growth to financial
stability as a prerequisite for growth. It explains much of the fi-
nancial asset growth and the simultaneous decoupling of com-
modity revenues from real sector development for growth in
the poorer developing countries.


In this context, sovereign wealth funds have mushroomed in
recent years and have served to direct developing economies’
windfall gains into foreign bond and stock markets. Of the $4.7
trillion held in such funds, it is estimated that 82 per cent are
owned by developing countries and within this share, an es-
timated $2 trillion are in commodity-based sovereign wealth
funds. These have contributed strongly to the delinking of fi-
nancial inflows, including commodity revenues, from the real
economy of these countries.


6. PERENNIAL PRObLEMS, NEw
ChALLENgES: SOME EVOLVINg
POLICy PERSPECTIVES


Facing the challenge at the global level
The challenges posed by recent developments in commodity
and financial markets have received considerable, albeit un-
even attention at the international level in the last couple of
years, most visibly within the framework of the G20. An intera-
gency consultation mandated to provide inputs to the G20 pro-
cess brought together 10 international organizations, including
UNCTAD, to debate the issue and identify policy directions. A
major outcome of this process has been a consensus that the
excessive influence on commodity markets of trading moti-
vated by financial and not commercial considerations should
be curbed, at least for some key commodities. Accordingly, a
number of financial market regulations have been proposed,
some of which are already being implemented. These include
measures aimed at greater transparency in futures trading and
the imposition of position limits to prevent excessive price fluc-
tuations over a given trading period. Other disruptive factors
beyond financial markets (such as trends towards concentra-
tion in global value chains, the impact of climate change and
the impact on CDDCs of changing final market destinations)
received less attention in these G20 discussions.


Considering that there is more or less general agreement that
the financialization of commodity markets has contributed sig-
nificantly to price volatility, many policy prescriptions necessarily
relate to financial markets and their regulation. There have been
calls for greater transparency on over-the- counter and derivative
commodity markets, as well as for tighter regulation of finan-
cial investors. Policymakers in many countries are still debating


whether to impose tighter limits on positions taken by financial
investors in commodity markets. Any such decision should be
based on the net impact of the actions of financial investors on
these markets for two reasons. First, prior to 2000 commodity
markets were partially segmented from financial markets, which
therefore meant that the increasing presence of commodity in-
dex investors had the potential to improve the sharing of com-
modity price risk. This could result in lower risk premiums and
therefore higher prices, on average, for producers. Second, their
presence has introduced a conduit for financial market volatility
to spill over into commodity markets. Thus, any regulations on
position limits should take care not to curtail the price discovery
and commodity risk sharing functions of financial investors.


There appears to be limited appetite for new international ac-
tion on the use of buffer stocks and active market intervention
to stabilize prices – areas that were a traditional concern of
international commodity bodies and which were central to the
Integrated Programme for Commodities.5 Academic analyses
have shown that commodity agreements were not able to re-
duce price volatility and that compensatory financing tended to
be too slow to have a stabilizing effect. In any case, given the
financialization of commodity markets, it is unlikely that any
intergovernmental bodies could command sufficient funds to
“face down the market”.


When the food crises of 2008 prompted international concern
about the rapidly rising commodity prices, policy discussions
on this issue were led by the G20. However, none of the world’s
poorest countries, defined by the United Nations as the least
developed countries (or even those defined by the World Bank
as low-income countries), are represented on this group. Yet
they are among the countries that tend to be the worst affected
by high commodity prices. Future policy discussions on inter-
national trade in commodities therefore need to incorporate the
views of those countries. This suggests that the G77 should be
directly involved as well as regional organizations of the South.
The United Nations, and especially UNCTAD, the Food and Agri-
culture Organization of the United Nations (FAO) and the Com-
mon Fund for Commodities, which have considerable expertise
on commodities issues, should also play a leading role.


Beyond the global level: action is also
required at the national level
The failure of the prevailing international economic system to
resolve commodity-related problems at the global level is one
of the main reasons why CDDCs’ economies lack resilience.
Nevertheless, there are a number of policy measures that can
be implemented at the national level. The management of re-
source rents should seek to channel revenues in order to find a
balance between two objectives: to keep debt levels and fiscal
balances at a sustainable level, and to invest in the domestic
economy, particularly in productive sectors, and stimulate do-
mestic demand in order to achieve social and economic devel-
opment goals in line with overall development objectives.


CDDCs should also seek to enhance their share of the rents
generated in commodity production. For minerals and fuels and
oil and gas, this entails, among other things, revising existing


oVerVIew




xxiv


COMMODITIES AND DEVELOPMENT REPORT


investment or mining contracts. This may include putting in
place a more equitable and efficient form of taxing extractive
industries, such as the imposition of progressive taxation on
profits and differentiated production and taxes.


Beyond ensuring a greater share of resource rents, CDDCs
should seek to build value added by targeting the broadening
and deepening of linkages from commodity production as a
prime policy objective. This requires that countries address the
conditions under which linkages from the commodities sector
may be extended and this, in turn, requires active industrial
and infrastructure policies to both increase local inputs and to
extend forwarding processing. Unlike issues of taxation where
there are in general win–lose outcomes between governments
and foreign investors, the enhancement of linkages to the com-
modities sector provides greater scope for joint action designed
to deliver win–win outcomes, and in so doing, to promote local
employment and domestic value added.


A range of synergistic policies designed to promote linkages
can be identified, some of which are relevant across sectors
(for example, improvements in infrastructure and the intro-
duction of incentives to promote training, investment and in-
novation). Other policies are sectorally-specific. For example,
for agricultural commodities, countries could help producers
improve their bargaining power in global value chains by en-
couraging collective action (cooperatives and farmers’ associa-
tions). Market-based institutions, primarily warehouse receipt
systems and physical commodity exchanges, could help farm-
ers obtain better prices for their produce. Furthermore, greater
market transparency and the use of risk-management strat-
egies could transform small-scale farms into more efficient
agricultural enterprises with increased profit margins. Small
scale farmers could also be assisted to achieve the standards
required to participate in global value chains, and to cope with
the particular demands of participating in unfamiliar markets
(for example, in value chains which sell into new middle and
low income markets such as China and India).


Given the gaps in existing domestic policies towards the com-
modities sector in the light of the new challenges and op-
portunities confronting this sector, this Report recommends a
four-pronged strategy for the CDDCs’ consideration as an ac-
companiment to earlier recommendations in the international
architecture that would be required to support that strategy:


a. Introduce specific measures designed to promote food se-
curity;


b. Prepare for the possibility of lower commodity prices and a
consequent decline in commodity export earnings, govern-
ment revenues and economic demand;


c. Strengthen existing or create new regional economic blocs
and preferential trade arrangements to reduce vulnerability
to global shocks and an excessive dependence on com-
modities;


d. Harness the windfall revenues from higher commodity
prices to facilitate wider economic transformations in order
to boost economic growth that is not driven by commodi-
ties alone.


(a) Introduce specific measures to promote
food security


In order to avoid a repeat of the severe food crises of 2008,
poor countries urgently need to put in place some form of food
reserve. For example, they could establish local food storage
facilities backed by a regional reserve in order to guarantee
future supply, or a virtual reserve with the objective of keeping
prices within a narrow band on futures markets (that is, to curb
price volatility). Indeed, particularly in Africa, a regional policy
for food reserves to help safeguard food security against any
future global food price shocks is necessary. However, experi-
ences and negotiations concerning regional initiatives in Africa
and Asia reveal that the following four major issues would need
to be resolved:


(i) Setting achievable objectives;


(ii) The scale and components of a reserve system;


(iii) The mix of commodities to stockpile;


(iv) Aligning the interests of exporters, importers, rich and poor
neighbours.


Nonetheless, any developing country programme, especially in
Africa, should aim to rely as much as possible on smallholders’
surpluses for supplies for positive developmental effects.


At the same time, it would be useful to reduce reliance, as
elaborated below, on the main globally traded crops (maize,
rice and wheat) that have acted as transmission belts for price
shocks, even in countries that have generally secure food sup-
plies. It is also necessary to reduce imported inputs for agricul-
ture, such as mineral fertilizers and oil, through the pursuit of
agroecological farming practices which do not absorb scarce
foreign exchange. In support of this, investment is needed in
research and development of agricultural technology to raise
food production levels in developing countries.


Food security could also be promoted by increasing the tech-
nological and financial viability of smallholder agriculture and
encouraging food production for local use in addition to cash
crops. Also, policymakers should engage with smallholders as
a means of empowering them. Furthermore, research into al-
ternatives to fossil-based agricultural inputs and commercially
viable agroecological techniques would go a long way towards
promoting sustainable agricultural practices, particularly in
marginal areas. In the longer term there needs to be a more
resilient global food system to enable households and com-
munities to better cope with shocks.


Clearly, these economic policy tools should be combined with
social measures, including social safety nets, in order to protect
the most vulnerable and insecure sections of the population.


(b) Prepare for the possibility of lower
commodity prices and a consequent decline
in commodity export earnings, government
revenues and economic demand


Whatever may be the general level of commodity prices in the
future, their volatility itself constitutes a serious danger and




xxv


benefits nobody except hoarders and speculators. Developed
and developing countries have a shared interest in addressing
price volatility, having experienced higher inflation as a result
of commodity price hikes.


It is not recommended that central banks control domestic in-
flation by taking positions on commodity markets in order to
influence price movements. Both the public and private sectors
have considerable experience in smoothing out prices at criti-
cal points along commodity supply chains. They can make use
of physical or virtual stocks, exercise controls over production
and trade, and initiate marketing arrangements so as to meet
the specific goals pursued and the possibilities provided by
each market and value chain.


This suggests a major role for international commodity bod-
ies, which can research what kinds of reforms will provide
the best possible defence against price volatility in each par-
ticular case without according any initial preference to one
type of reform or another. The United Nations could play a
wider role in developing innovative thinking in this area and
in coordinating the work of reform of individual commodity
value chains.


To provide urgent relief in the event of an import price shock,
a global countercyclical financing facility should be established
with the capability to disburse funds rapidly to support food-
insecure countries, particularly LDCs.


(c) Strengthen existing or create new regional
economic blocs and preferential trade
arrangements to reduce vulnerability to
global shocks and an excessive dependence
on commodities


Over the past 50 years, regional trade arrangements have
contributed to the prosperity of the European Union and, more
recently, to rapid growth in East and South-East Asia. Indeed,
trade arrangements among neighbouring countries which are
at similar levels of development help them to develop domes-
tic businesses and domestic accumulation of capital – in other
words, they can foster genuine, autonomous self-sustaining
economic development. Similar preferential or free trade ar-
rangements as in Europe and parts of Asia should be promoted
in other developing regions.


The following institutions and architecture would be needed for
this purpose:


(i) Stronger regional economic blocs with harmonized policies
and standards, common external tariffs and preferential
treatment for regionally produced and traded goods;


(ii) Increased domestic and regional budgets to support agri-
culture and food policies.;


(iii) The creation of regionally based agricultural develop-
ment banks or agencies, which would pool the resourc-
es of member States to facilitate proactive agricultural
policies. Alternatively, existing regional development
banks could be encouraged to commit a certain mini-
mum percentage of their loan portfolios (for example, 5


or 10 per cent) to the agricultural sector. A global agen-
cy should also be set up to explore and coordinate the
new directions of agricultural and food policies based
on a revival of traditional agricultural practices and the
development of agroecological methods. These actors
should work closely with farmers and farm workers’ or-
ganizations, both at the regional and global levels, to
help reduce reliance on imported fuels, mineral fertiliz-
ers and agrochemicals.


In developing this architecture, it would be necessary to ensure
its compatibility with existing international trade disciplines,
including those of the World Trade Organization, while also
considering the need for possible reforms of those rules where
appropriate.


(d) Harness the windfall revenues from higher
commodity prices to facilitate wider
economic transformations in order to boost
economic growth that is not driven by
commodities alone


This traditional approach towards these issues focused on two
areas of potential growth that remain of considerable importance:


• The development of downstream commodity processing
and commodity-related industries;


• The stimulation of wider domestic trade and new economic
sectors, including manufacturing.


However, this approach needs to be augmented by paying
greater attention to the possibility of broadening and deepen-
ing upstream backward linkages (the supply of inputs into the
commodity sector) and to encourage lead commodity-produc-
ing firms to use local sources of supply as they seek to out-
source those elements on the value chain which are outside of
their core competences.


Several developing countries have attempted strategies to
achieve these objectives by relying on their earnings from
commodity exports. Lessons can be drawn from the success-
ful experience of Botswana, Malaysia, Mauritius, and particu-
larly in recent years, Brazil with regard to downstream link-
ages, and Chile and Nigeria with regard to increasing local
content.


In brief, at the international level the new architecture, or set
of institutions, recommended to support the above-mentioned
goals would be as follows:


(i) The establishment of economic development agencies
alongside regional trade organizations. Economic develop-
ment strategies could then be pursued concomitantly with
the development of regional trade;


(ii) UNCTAD could serve as the lead global agency to provide
guidance and coordination for this process, drawing on
nearly 50 years of experience in linking economic develop-
ment with trade and, in particular, its expertise on issues
relating to the commodity sector.;


oVerVIew




xxvi


COMMODITIES AND DEVELOPMENT REPORT


(iii) Revisit commodity-specific mechanisms aimed at ensuring
that exporting countries obtain an equitable share of the
income from commodity value chains. For example, Mauri-
tius benefited from such extended support through over 50
years of export guarantees for sugar under the European
Union–African, Caribbean and Pacific Group of States (ACP)
Sugar Protocol and its predecessor, the Commonwealth
Sugar Agreement.


The empirical evidence reviewed in this report suggests that in
the global context the overall impact of the commodity boom on
CDDCs has been limited. Thus, there is a need to (re-)establish
the link between higher commodity prices, growth in real sec-
tors and sustained growth of incomes through policies that give


greater priority to national development than to the investment
of windfall incomes abroad.


The commodity problem of the past half century is likely to
persist, in particular considering recent developments in global
financial markets. It is now time to involve all the stakeholders
to find solutions, since past experience suggests that markets
alone are not able to solve the problem. All possible ways and
means should be considered, with no ideological preferences
or preconceptions of what constitutes the “right” method or
outcomes. It is only in this spirit that the majority of CDDCs will
be able to make the most of commodities, which remain very
important to their economic growth and development and to
the livelihoods of their populations.


NOTES
1. CDDCs are defined as countries that depend on commodities for at least 60 per cent of their export earnings, constituted


100 of the 151 developing countries in 2009.


2. Some countries particularly in sub-Saharan Africa have also lost market share in traditional agricultural commodity exports due
to increased competition from other developing regions.


3. A virtual reserve is a fund which would normally consist not of actual budget expenditures, but of promissory, or virtual, financing
by a group of States (for example, the G20). The fund, which would be drawn upon by a high-level technical commission only
when needed for intervention in the futures market, is thus a notional commitment to stabilize prices which has the effect of
limiting price volatility on those markets.


4. The empirical analysis of the impacts of the commodity price boom on developing countries is based on data for a sample of
142 developing and emerging countries over the period 1995–2009. The model does not disaggregate the data or introduce
dummy variables according to type of economy (for example, small island State, landlocked country, least developed country)
or export specialization (minerals, metals, oil or non-oil), as this is beyond the scope of this Report.


5. The UNCTAD Integrated Programme for Commodities (IPC) was negotiated in 1980, leading to the creation of the Common
Fund for Commodities (CFC) in 1989. The CFC, is comprised of thirteen Intergovernmental Commodity Bodies (for example,
the International Coffee Organization) and ten FAO subsidiary commodity bodies. These organizations emerged as part of the
UNCTAD IPC.





Chapter 1:


REVISITINg ThE “COMMODITy
PRObLEM”


1. Introduction ................................................................................................................................................2


2. Commodity dependence, poverty traps and vulnerability .............................................................................2


3. Commodities, Ricardo and the Prebisch-Singer hypothesis .........................................................................9


4. Commodity revenues as a driver of diversification .....................................................................................11


5. Managing commodities .............................................................................................................................13


5.1. Commodity revenues as a “resource curse” revisited ....................................................................13


5.2. Extractive sectors: ensuring an equitable distribution of windfall gains ..........................................13


5.3. Agriculture: securing commodity rents ..........................................................................................14


6. The commodity problem: some preliminary views ....................................................................................15


References ...........................................................................................................................................................17




2


COMMODITIES AND DEVELOPMENT REPORT


Commodity
dependence has


too often been
associated with
sluggish growth


and low levels
of economic


and social
performance.


Three key
features of
commodity


markets that
keep CDDCs in


a poverty trap: (i)
unpredictability


and volatility
of international


prices; (ii) the
secular decline
of commodity


prices; and
(iii) a tendency


towards greater
concentration


of trade and
production in


TNCs.


1. INTRODuCTION
Throughout the 1940s, what has been termed the
“Cambridge doctrine of the terms of trade” prevailed
(Toye, 2000). According to this doctrine, the terms
of trade (i.e. the ratio of commodity prices to those
of manufactures), would tend to increase over time
in favour of commodities. While the Cambridge doc-
trine was later questioned by some classical econo-
mists, it was not until the 1950s that the Prebisch-
Singer hypothesis, developed in the United Nations,
challenged the belief that commodity prices rise at
a greater rate than those of manufactures. Their in-
terest in the terms of trade was part of a broader
interest in why poor countries were constrained in
their efforts to develop. In their analyses of historical
data relating to the long-term trend in the terms of
trade, they observed that from the latter part of the
nineteenth century to the eve of the Second World
War there had been a secular decline in the prices of
primary goods relative to the prices of manufactured
goods (Toye and Toye, 2004; see also box 1.1).1


This secular decline was identified as the major de-
velopment problem facing commodity-dependent
developing countries (CDDCs),2 as it meant a loss of
capacity to absorb foreign financing for development
(Toye and Toye, 2004), caused severe difficulties in
generating domestic savings and in financing devel-
opment, and thus more or less perpetuated the state
of underdevelopment. This came to be perceived as
the core of the “commodity problem” in the context
of the quest for economic growth and development
by CDDCs.


Commodity dependence has too often been associ-
ated with sluggish growth and low levels of econom-
ic and social performance (Sachs and Warner, 1997),
and with the so-called “Dutch disease”. This latter
phenomenon refers to the tendency for large windfall
revenues of foreign exchange to result in an uncom-
petitive exchange rate, which consequently weakens
the export sector and perpetuates aid dependence
(Killick, 2004). When low growth of an economy and
of social expenditure, along with the Dutch disease,
are accompanied by rent seeking and an overcon-
fident government, it is plagued by the “resource
curse” (Gylfason, 2001). However, a number of stud-
ies have challenged the resource curse thesis. In
particular, it has been argued that resource endow-
ment is neither “a curse nor a destiny” (Lederman
and Maloney, 2007). Instead, at best there has been
“resource disappointment.”3 Taking the argument
further, some studies have contended that causality
goes from the quality of institutions to commodity
dependence rather than the other way around, plac-
ing greater emphasis on the use of resource rents
as key to development outcomes (Brunnschweile
and Bulte, 2008). While there remains controversy
over the chain of causality, the fact remains that


many commodity-dependent countries have failed
to generate broad-based growth. The “commodity
problem” refers to the toxic combination of Dutch
disease and resource curse effects, accompanied
by a secular decline in real commodity prices in a
context of volatile international prices, greater con-
centration of commodity production and trade in
transnational corporations (TNCs), and exposure to
external shocks accompanied by increasing vulner-
ability to such shocks.


This chapter briefly discusses the relationship be-
tween commodity dependence and poverty traps
(section 2), and reviews a wide range of theoretical
and empirical literature concerning the “commodity
problem”. Section 3 begins with a review of Ricar-
do’s theory on commodities contrasting it with the
Prebisch-Singer hypothesis, and then highlights key
conceptual differences between the commodity and
manufacturing sectors and the corresponding devel-
opment implications. Finally section 4 reviews some
of the recent literature on the “commodity problem”
in the context of new and evolving development
paradigms.


2. COMMODITy
DEPENDENCE,
POVERTy TRAPS AND
VuLNERAbILITy


Commodity dependence is particularly acute in sub-
Saharan Africa, South America, Central Asia and the
Middle East, which highlights the limited diversifi-
cation of these economies (figure 1.1).4 Although
commodity exporters have benefited from very
high commodity prices since 2003, many develop-
ing countries are also net importers of food and/or
energy, and have therefore not fully shared in these
benefits. The commodity sector is not only the ma-
jor economic activity in most CDDCs, it is also their
main source of foreign exchange earnings, fiscal
revenues, income growth and livelihood sustenance.
To some extent, for many of these countries depen-
dence on primary commodities has defined their
economic policy (making commodity exports the pri-
mary driver of growth) and development trajectory.


Indeed, their dependence on a few primary prod-
ucts has remained unchanged, and perpetuates a
commodity-dependent poverty trap. The poverty
trap may be defined as a situation in which poverty
has effects which also serve as causes of poverty.
The poverty trap makes it difficult for low-income
countries to achieve long-term growth, in particular
via industrialization which is an essential means for
escape from the trap, as industrial products are less
subject to price volatility (Gore, 2003). Factors such
as low productivity, low value-added and the export
of primary products (i.e. commodities), which, due to
technological progress, represent a decreasing unit




3


cHapter I: Revisiting the “commodity pRoblem”


There is a need
to establish
commodity-
related
stabilization
mechanisms to
address income
and price shocks
for CDDCs.


Hence, the persistence of the “commodity prob-
lem”, which is the outcome of the CDDCs’ dwindling
capacity to withstand large commodity shocks, ef-
fectively forces them to bear a large share of the
global costs of commodity market volatility. This
mechanism operating at the macro level has power-
ful economy-wide ramifications. And it is likely to be
a major factor hindering a country’s efforts to reduce
structural vulnerability, resulting from its undimin-
ished exposure to shocks, combined with a failure to
build greater resilience.


These are uncertain times for primary commodity
producers, traders and markets. Commodity prices,
although volatile, are currently high, and there are
a number of countries (e.g. Australia, Botswana,
Canada, Chile, Indonesia, Malaysia and Norway)
that have succeeded in adopting a commodity-
based development strategy which has generated
economic growth and employment and helped re-
duce poverty. However, many other developing
countries have been unable to translate their higher
revenues into real development gains. The majority
of CDDCs are locked into a trading structure that
subjects them to secular terms-of-trade losses and
volatile foreign exchange earnings. This severely
encumbers effective macroeconomic management
and stunts capital formation, hampering efforts to
diversify into more productive activities while add-
ing to these countries’ debt overhang. As a result,
despite an unprecedented commodity boom during
the period 2003–2008 most developing countries
remained commodity-dependent. Current debates
revolve around the question of whether the 2003–
2011 commodity boom5 was simply a spike in the
longer term trend of declining terms of trade, or
whether this secular trend has been durably re-
versed (box 1.1).


In 2009, out of 153 developing countries, 92 de-
pended on commodities for at least 60 per cent of
their export earnings. In the same year, half of the
countries in Africa derived over 80 per cent of their
merchandise export income from commodities.6
The persistence of established patterns of export
concentration and a lack of diversification in many
CDDCs is reflected in figure 1.2, which shows the
export concentration index7 for primary commodi-
ties8 regressed against merchandise exports for
two periods: 1999-2000 and 2009-2010. The upper
right quadrant of each chart shows those developing
countries where total commodity exports account for
more than 60 per cent of total merchandise exports
and an above sample average concentration index.
From this, it appears that commodity concentration
has marginally declined over the past decade, from
56 to 51  countries. However, commodity depend-
ence, where terms-of-trade of commodity exports
account for more than 60 per cent of total merchan-


share of GDP are often the main factors contribut-
ing to poverty traps. Moreover, arguably, the current
commodity trade relationships between China and
the South as a source of demand for commodities,
which are then used by China to produce manufac-
tures for the North, may further entrench CDDCs in
this lower end of the international division of labour.
Indeed, UNCTAD has highlighted the fact that “in-
ternational poverty traps” in commodity-dependent
countries, combined with international trade and fi-
nance relationships, reinforce boom and bust cycles,
which, in turn, reinforce the negative impact of ex-
ternal relationships. UNCTAD (2002) has argued that
globalization tightens the poverty trap due to the
creation of closer linkages between energy and ag-
ricultural commodity markets, and commodity and
financial markets, which increase both price volatil-
ity and instability, and thus uncertainty, with negative
impacts on government financial management and
investment.


There are at least three key features of commodity
markets that can keep those that are dependent on
commodities in a poverty trap. First is the unpredict-
ability and increased volatility of international prices.
This volatility is an intrinsic feature of commod-
ity markets, which was amplified during the 2003–
2008 commodity boom because of the growing link-
ages between commodities and financial markets,
with commodities increasingly traded as financial
assets. Second is the belief that over the long term,
prices of commodities decline (in relation to prices
of finished goods or goods to which value has been
added), stemming from the Prebisch-Singer theory
of the secular decline of commodity prices. This ex-
plains slow economic growth and the persistence
of underdevelopment in low-income countries. And
third, there is a tendency towards greater concentra-
tion of international commodity production and trade
in transnational corporations (TNCs). Globally, there
is also increasing vertical integration of large firms
(whether TNCs or supermarket chains).


The detrimental effects of commodity dependence
on development are closely related to economic
vulnerability, which is caused by the reliance of a
country on commodities as the main conduit for
participating in world trade resulting in its high de-
gree of exposure to shocks. This vulnerability to ex-
ogenous shocks is at the heart of this analysis and
highlights the need for establishing commodity-
related stabilization mechanisms to address both
income and price shocks facing CDDCs. However,
these mechanisms have never been fully realized
because international financial institutions have
consistently failed to resolve commodity-related
problems at the global level by establishing appro-
priately structured global facilities for alleviating
income and price shocks.


In 2009, out of
153 developing
countries, 92
depended on
commodities
for at least 60%
of their export
earnings.




4


COMMODITIES AND DEVELOPMENT REPORT


Box 1.1. Terms of trade for commodities versus manufactures


Until the end of the Second World War the assumption was that the terms of trade would favour commodities.
Prebisch and Singer who challenged this view working independently, analysed the evolution of prices of the
United Kingdom’s exports (predominantly of manufactures) and imports (predominantly of commodities) for the
period 1870 to 1945. They found that commodity prices had in fact fallen relative to the prices of manufactures.
The underlying causes of this finding are discussed in detail in section 2 of this chapter. Given the various policy
implications of these findings, the relative prices of commodities and manufactures have been under scrutiny
ever since.


As to whether the commodity booms of the 1950s and 1970s altered long-term demand, and thus the prices of
these products, remains a topical research question. It is argued that in both periods price hikes were mainly “a
response to a combination of perception of sustained demand growth and [short-term] constraints to supply”,
and were not due to a sustained structural imbalance between the supply of and demand for commodities
(Farooki and Kaplinsky, 2012: 55). Prices thus declined rapidly when supply again increased and real demand
was reestablished. Most studies conducted on this subject have concluded that in the long run commodity
prices fall relative to manufactures. The following list shows the conclusions of various studies concerning the
terms of trade for commodities.


Few studies, however, include data for the recent 2003–2011 commodity price boom. During this period there
were rapid increases in commodity prices, combined with falling and then slowly rising prices of manufactures.
These trends were much longer than those observed in previous commodity booms. This raises the question
as to whether there has been a structural break, that is, a long-term and durable change in the relative prices of
commodities and manufactures. Farooki and Kaplinsky (2012) provide insights into this question through their
compilation of a data series up to 2008 which is based on an update of the Grilli and Yang Commodity Price
Index (1988) presented in Pfaffenzeller et al. (2007). The update presents terms-of-trade data from 1949 to
2003 using 24 commodities (excluding oil) and the manufacturing unit value index (MUV-G5), which is a trade-
weighted index of the exports of manufactured commodities to developing countries by the five major developed
countries – France, Germany, Japan, the United Kingdom and the United States. While it is recognized that
the MUV-G5 is far from perfect, “it is the only readily available trade-based manufacturing price measure over
a suitably long time horizon” (Pfaffenzeller et al. (2007: 7). Farooki and Kaplinsky (2012) find that from 1949 to
approximately mid-2000 the terms of trade for commodities were indeed trending downwards but that in the
last few years, starting from 1999, they have seen an upward trend (box chart 1).


Farooki and Kaplinsky (2012) analyse this phenomenon by focusing on China, given that this country has
become one of the leading global manufacturing centres. They estimate that the prices of manufactures are
likely to remain low and competition intense, despite rising wages in the coastal areas of China where the bulk
of its export-oriented manufacturing industries are located. Firms could relocate production to China’s interior,
which is increasingly connected to major ports, or they may even relocate to other developing countries that
have surplus labour. Regarding the outlook for commodity prices, upward pressure is likely to be sustained due
to real demand from China and from other fast growing developing countries which have followed resource-
intensive growth strategies. However, the authors concede that continued expectations of rising commodity
prices may trigger a supply response of commodities, which would lead to lower prices and reverse the terms
of trade in favour of manufactures. For soft commodities, this seems rather unlikely to occur, given the existing,


Results Studies


Negative trends Spraos (1980), Thirlwall and Bergevin (1985), Sapsford (1985), Grilli and Yang (1988), Ardeni
and Wright (1992), Bleaney and Greenaway (1993), Cashin and McDermott (2002), Erten and
Ocampo (2012).


No trends Cuddington and Urzua (1989), Powell (1991).
Structural break – 1950 Sapsford (1985).
Structural break – 1920 Cuddington and Urzua (1989).
Structural break – 1921, 1938 and 1975 Powell (1991).


Source: Adapted from Farooki and Kaplinsky (2012).




5


cHapter I: Revisiting the “commodity pRoblem”


Box 1.1. Terms of trade for commodities versus manufactures (continued)


dise exports, increased from 85 to 92 countries dur-
ing the period 1999-2000 to 2009–2010.


Almost half of all 92 CDDCs are in sub-Saharan Af-
rica (figure 1.1). Differentiating between regions and
types of commodity product dependence, the rate
of dependence for oil-producing countries is on av-
erage 85 per cent, compared with 77 per cent for
non-oil-producing CDDCs. Most of the oil-producing
CDDCs are based in West Asia (9 out of 27 CDDCs).9


Whereas most of the non-oil-producing CDDCs are
located in sub-Saharan Africa (36 out of 65 CDDCs).


Given that many developing countries, especially
LDCs, are heavily dependent on commodities (box
1.2), the international community cannot effectively
attain the Millennium Development Goals (MDGs),
including poverty reduction, without taking into ac-
count the importance of commodities to their trade
and development prospects.


persistent and increasing supply constraints (OECD-FAO, 2008). Farooki and Kaplinsky (2012) also see limited
scope for an increase in the low-cost supply of energy, while noting that the supply of hard commodities is more
difficult to estimate. However, they maintain that the supply of new and large volumes of hard commodities is
unlikely to occur at least until 2020-2025, when current investments in exploration and mine construction will start
increasing volumes. In their view, it is likely that “the terms of trade reversal that began in 1999 will be sustained for
some time in the future” (Farooki and Kaplinsky, 2012: 187). Whether this will lead to a long-term structural break
remains to be seen, but at least it indicates a potential commodity super-cycle.


However, Erten and Ocampo (2012), in a recent analysis of four super-cycles since the mid-nineteenth century,
assume that the last of these cycles which started in 1999 peaked in 2010. Their analysis shows a long-running
downward trend in the terms of trade in line with the Prebisch-Singer hypothesis (i.e. the mean of each super-cycle
of non-oil commodities being generally lower than for the previous cycle). If their assumption that the ongoing
cycle peaked in 2010 turns out to be correct, then the view that there has been a structural break in the decline in
the terms of trade would have to be reconsidered.


In this context, it is perhaps worth mentioning that a recent study by the International Trade Centre of UNCTAD/
WTO (ITC, 2011) on the terms of trade of the least developed countries (LDCs) covering the period 2007–2010
found that in 2009 the terms of trade showed average declines against major partners (Japan, the EU-27 and the
United States), ranging from 17 to 36 per cent relative to 2006 levels. Significant declines were also recorded against
gains made in 2008, at the peak of the 2003–2011 commodity boom. Although trade (in value terms) with Brazil, the
Russian Federation, India, China and South Africa (BRICS) proved more resilient than with developed countries, for
LDCs the terms of trade still deteriorated with all partners analysed. Thus the debate on the secular decline in real
commodity prices vis-à-vis those of manufactures and other traded products is likely to rage on for some time yet.


0


0.2


0.4


0.6


0.8


1


1.2


1.4


1.6


19
50


19
52


19
54


19
56


19
58


19
60


19
62


19
64


19
66


19
68


19
70


19
72


19
74


19
76


19
78


19
80


19
82


19
84


19
86


19
88


19
90


19
92


19
94


19
96


19
98


20
00


20
02


20
04


20
06


20
08


Te
rm


s
of


tr
ad


e


Box chart 1. Evolution in the ratio of terms of trade of commodities to manufactures, 1950–2008


Source: Farooki and Kaplinsky, 2012 (compiled from data from Pfaffenzeller et al., 2007).




6


COMMODITIES AND DEVELOPMENT REPORT


Figure 1. 1. Regional distribution of CDDCs, 2009-2010 average


Source: UNCTAD secretariat calculations, based on UNCTADstat.


Eastern Africa, 14%


Western Africa, 18%


Southern Africa, 2%


Middle Africa, 9%


Northern Africa,
3%


Caribbean,
7%


Central America, 2%


South America, 14%


Eastern Asia,
1%


South-Eastern Asia,
5%


Southern Asia, 2%


Western Asia, 10%


Oceania, 12%


During the 1960s and 1970s, the “commodity prob-
lem” was a major concern for developing countries
emerging from colonialism, as well as for donors and
international organizations, but it was largely absent
from the development discourse during the 1980s
and 1990s. However, as a consequence of sharp in-
creases in commodity prices since 2002, this “prob-
lem” has returned to the top of the international devel-
opment agenda (e.g. in G20 discussions during 2011).
Today, debates about the “commodity problem” and
the impact of market volatility on developing countries


Commodity
dependence


increased
1999-2000


and 2009-2010.


and the global economy are taking place against the
background of the following major changes: (i) shifts
in the global balance of economic power (Kaplinsky,
2006); (ii) the increasing financialization of commodity
markets (UNCTAD, 2011); and (iii) the greater acces-
sibility and diversity of risk mitigation instruments, as
well as initiatives by the G20 (see FAO et al., 2011).).
These debates would be better informed by improving
an understanding of the causes and effects of struc-
tural economic vulnerability of developing countries
and LDCs (Guillaumont, 1999).




7


cHapter I: Revisiting the “commodity pRoblem”


Figure 1.2. Commodity dependence and export concentration in CDDCs, 1999–2000
and 2009–2010 averages


Source: UNCTAD secretariat calculations based on UNCTADstat and IMF, International Financial Statistics.
Note: The horizontal line shows the average concentration index for the period on both graphs. The vertical


line shows commodity exports vs. merchandise exports above 60 per cent. The sample comprises
151 developing countries. The CDDCs are on the right half of the chart.


0.0


0.1


0.2


0.3


0.4


0.5


0.6


0.7


0.8


0.9


1.0


0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0


Co
nc


en
tr


at
io


n
in


de
x


Dependency rate = Commodities/merchandise exports


A. 1999–2000


Countries exporting agri. commodities


Countries exporting fuels


Countries exporting minerals, ores and metals


0.0


0.1


0.2


0.3


0.4


0.5


0.6


0.7


0.8


0.9


1.0


0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0


Co
nc


en
tr


at
io


n
in


de
x


Dependency rate = Commodities/merchandise exports


B. 2009–2010


Countries exporting agri. commodities


Countries exporting fuels


Countries exporting minerals, ores and metals




8


COMMODITIES AND DEVELOPMENT REPORT


Box 1.2. Commodity dependence, structural change and growth


Box chart 2 shows that the share of commodities in total merchandise trade has changed dramatically in
sectoral terms since 1995, with the share of fuel exports rising by 16 per cent between 1995 and 2010 at the
expense of agricultural exports. Exports of minerals, metals and ores maintained their share in merchandise
trade at around 9 per cent. The long-term demand for the CDDCs’ leading commodity exports over the period
1995–2010 has grown more rapidly than their real GDP and population growth rates (1.5 per cent). Thus it
could be argued that the commodity intensity of GDP has been increasing, especially after 2003. The chart
shows that this is mainly focused on minerals, ores, metals and energy commodities. However, it may well be
primarily a function of higher prices, as discussed earlier.


0


500 000


1 000 000


1 500 000


2 000 000


2 500 000


0


10


20


30


40


50


60


70


80


90


100


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


M
er


ch
an


di
se


e
xp


or
ts


b
y


va
lu


e
($


m
ill


io
n)


Sh
ar


e
of


c
om


m
od


ity
g


ro
up


s
in


to
ta


l m
er


ch
an


di
se



ex


po
rt


s
(%


)


Agricultural products exports Fuels exports


Minerals, ores and metals exports All merchandises exports, right axis


0 2 4 6 8 10 12 14 16 18


Population average annual growth


Real GDP average annual growth


[41] Animal oils and fats


[42] Fixed vegetable oils and fats, crude, rened or fractionated


[02] Dairy products and birds' eggs


[23] Crude rubber (including synthetic and reclaimed)


[68] Non-ferrous metals


[35] Electric current


[22] Oil seeds and oleaginous fruits


[32] Coal, coke and briquettes


[33] Petroleum, petroleum products and related materials


[34] Gas, natural and manufactured


Per cent


Box chart 2. Share of commodity groups in merchandise trade, 1995–2010


Box chart 3. Average annual growth rate of the 10 leading commodity
exports of CDDCs, 1995–2010


Source: UNCTAD secretariat calculations, based on UNCTADstat.


Source: UNCTAD secretariat calculations, based on UNCTADstat.
Note: The figures in brackets denote the codes used in STIC, revision 3, product groups.




9


cHapter I: Revisiting the “commodity pRoblem”


Box 1.2. Commodity dependence, structural change and growth (continued)


It is argued that developing countries with a heavy dependence on commodity exports tend to grow more slowly
than those with diversified economies. This situation is perhaps more a reflection of significant structural economic
weaknesses and low GDP per capita, coupled with a high dependence on natural resources as a source of
national income, rather than the quantity or quality of available natural resources in CDDCs. Box chart 4 shows
that in terms of the value of exports, developed countries tend to be as resource rich as developing countries but
far less dependent on natural resources due to their greater economic diversification. In landlocked developing and
least developed countries the shares of primary commodity exports in total merchandise exports were 83 per cent
and 78 per cent, respectively, in 2009-2010 whereas in developed countries the share averaged 23 per cent. For
CDDCs as a group, the comparative ratio was 68 per cent.


McMillan and Rodrik (2011) show that since 1990 structural change has been resulting in a slowdown of growth
in both Africa and South America, with the most striking changes taking place in Latin America. However, the
situation is different in Asia. They argue that most of the differences between Africa and South America are due
to differences in productivity performance, while in Asia they are mainly due to the pattern of structural change
(primarily labour moving from low- to high-productivity sectors). They maintain that in countries with a high degree
of dependence on exports of natural resources, structural change typically has been growth-reducing and has
reduced the ability to absorb surplus labour from the agricultural sector.


3. COMMODITIES, RICARDO
AND ThE PREbISCh-
SINgER hyPOThESIS


Adam Smith (1776) explained the existence of in-
creasing returns to scale in manufacturing based on
rising labour productivity resulting from the division
and specialization of labour in production. Ricardo
(1815) argued that in contrast to manufacturing, for
a given level of technology, agricultural and mining
production was subject to diminishing marginal re-
turns as more marginal and less fertile lands were
brought into use and less productive mines were
developed. This could potentially raise the mar-
ginal costs of production, and therefore increase


0 20 40 60 80 10
0


B. Primary commodity exports as a share
of merchandise exports (per cent)


0


50
0


00
0


1
00


0
00


0


1
50


0
00


0


2
00


0
00


0


Developed countries


Least developed
countries


Landlocked developing
countries


Developing countries
excluding LDCs


Small island developing
States


A. Value of primary commodity
exports ($ million)


Box chart 4. Exports of primary commodities by country groups, 2009–2010 average


Source: UNCTAD secretariat calculations, based on UNCTADstat.


the relative prices of agricultural and mining com-
modities over time. Fundamentally, the fact that
manufacturing is subject to increasing returns to
scale, whereas agriculture and mining are subject
to diminishing marginal returns, has profound impli-
cations for overall economic growth (Kaldor, 1966;
Young, 1928). Rising prices of commodities would
push up economic rents, and higher food prices, in
particular, would place pressure on wages to rise,
and both would be at the expense of profits in the
manufacturing sector.10 The lower the rate of prof-
its and thus investment in the manufacturing sector,
and the higher the primary sector rents, the slower
would be the rate of growth in the economy. Ricardo
(1815) recognized that the potentially limiting factor




10


COMMODITIES AND DEVELOPMENT REPORT


of higher food prices could be overcome by techno-
logical progress in the primary sector, which would
then lower commodity prices and land rents.


Following from Ricardo’s proposition of diminishing
marginal returns from commodity production versus
increasing returns to scale and greater productiv-
ity growth in manufacturing, the net barter terms
of trade (NBTT) (i.e. relative unit prices) between
commodities and manufactured goods should, in
theory, lead to an improvement in the terms of trade
for commodity producers over time. From an inter-
national trade perspective, the policy implication for
commodity-exporting countries was that they need
not industrialize; they could benefit from the gains of
technical progress in foreign manufacturing indus-
tries through trade. However, on analysing data for
the NBTT of the United Kingdom from 1876 to 1947,
Prebisch (1950) and Singer (1950) both found that
in the long run the NBTT had in fact deteriorated for
commodity-exporting developing countries, thereby
refuting the classical hypothesis. Further, given the
greater productivity growth in manufacturing, the
double factoral terms of trade11 had worsened for
the commodity exporters. Table 1.1 outlines the
main causes of deterioration of the terms of trade
according to different authors.


The explanations for the deterioration in the terms of
trade given by Prebisch and Singer differed slightly.
Prebisch explained the phenomenon as cyclical: a
cycle of decline in the terms of trade, where, in an
upswing, wages and profits – and therefore prices –
rise more in the North (industrialized countries) than
in the South (developing countries) due to stronger
labour unions and cost-plus pricing12 by firms in


the North. In the downswing, industrialized coun-
tries’ profits and wages do not fall much due to the
nominal rigidity of wages. Therefore, the burden of
adjustment falls on the raw material exporters of the
South; their prices would fall more than the prices
of manufactures in cyclical downturns (Engel, 1857;
Prebisch, 1950). Singer argued that the distribution
of the gains from technical progress could be distrib-
uted either to producers through higher incomes, or
to consumers through a decline in prices.


According to Singer, in the case of manufactures in
the more developed countries, technical progress
would result in higher incomes rather than falling
prices, whereas in the production of food and raw
materials in the less developed countries, technical
progress would lead to falling prices. In international
trade, therefore, consumers in developed countries
would benefit from lower import prices as a result of
technical progress in developing countries, whereas
rising incomes and cost-plus prices of manufactures
from developed countries would create an absolute
burden on developing countries that rely on imports
of manufactures from the North.13 Thus Singer con-
tended that the unequal distribution of productivity
was mainly a result of a lower elasticity of demand
for raw materials than for manufactured products.
Prebisch, on the other hand, believed it was largely
a result of a lack of unionized labour in the South
compared with established, organized labour unions
in the North capable of negotiating wage increas-
es. Lewis (1954) expanded on Singer’s hypothesis,
arguing that, fundamentally, it is the availability of
surplus labour and the near perfect elasticity of
supply of labour in developing countries that holds


The Prebisch-
Singer thesis


suggests that
without major


changes in the
structure of the


global economy,
the gains from


trade will continue
to be distributed


unequally
between CDDCs
exporting mainly


primary products
and those


exporting mainly
manufactures;


hence its enduring
significance.


Table 1.1. Causes of deterioriation in the terms of trade of CDDCs, according to different authors
Causes of deterioration in the terms of trade Authors


Supply side


Wages for organized workers in developed countries rise. Prebisch (1950), Singer (1950), UNCTAD (1982)


Wages and earnings in CDDCs’ export sectors remain stable
because of unlimited supply of labour.


Prebisch (1950), Lewis (1954)


Structural rigidity in primary production in CDDCs. Kindelberger (1956), Myrdal (1957)


Demand side


Engel’s law, where the income elasticity of demand for food decreases with increasing
income.


Falling demand in developed countries due to: (a) technological progress that reduces


primary inputs in manufacturing, and


(b) use of artificial substitutes.


Engel (1857), Kindelberger (1950), Prebisch (1964),
Porter (1970)


Singer (1950), Kaldor (1963), UNCTAD (1982)


(c) protectionism in developed countries that reduces imports from CDDCs and LDCs. Prebisch (1964), UNCTAD (1982)


Source: Adapted from Daviron and Ponte (2005).




11


cHapter I: Revisiting the “commodity pRoblem”


down wages in production despite increases in la-
bour productivity; and assuming a constant overall
profit rate, export prices from developing countries
would experience a systematic decline relative to
developed-country manufactured exports.


Taylor (2004), Prebisch and Singer, among other au-
thors, who belong to the structuralist school of develop-
ment economics, endorsed the objective of industriali-
zation for CDDCs as a means of escaping the lower end
of the international division of labour. Although this was
not specifically a recommendation of the structuralist
school, several countries adopted import substitution
strategies which aimed to substitute imports with lo-
cally produced manufactures (Rodrik, 1997). Most of
the CDDCs that pursued this strategy, financed their in-
dustrialization strategies by heavily taxing the primary
sector based on the flawed assumption that farmers
had a low propensity to save and were relatively price
insensitive (Kaldor, 1963). However, many of these
countries began to develop major balance-of-payments
problems in the 1950s when international commodity
prices declined sharply (Furtado, 1970). Also, during
the 1950s and 1960s several international debates
promoting multilateral action for managing commodity
markets led to the creation of the United Nations Con-
ference on Trade and Development (UNCTAD) and of
several international commodity agreements (ICAs) as
tools for stabilizing export revenues through price sup-
port measures (Maizels, 1992).


However, the global political and economic land-
scape has changed considerably since the UNCTAD
Integrated Programme for Commodities (IPC) was
negotiated in 1980, leading to the creation of the
Common Fund for Commodities (CFC) in 1989. As
observed by UNCTAD (2003: 33) “With recession in
the world economy in the 1980s and the subsequent
overall decline of commodity prices, combined with
the breakdown of multilateralism in international
economic relations and the ascendancy of market-
oriented strategies, intervention in markets (at least
in favour of developing countries) was no longer
deemed acceptable or feasible.” Moreover, the in-
tervention role of the ICAs was undermined by the
long bear market of the 1970s and later in the con-
text of the multilateral disciplines of the World Trade
Organization (WTO), which succeeded the General
Agreement on Tariffs and Trade (GATT) in 1995.


The Prebisch-Singer hypothesis has been the sub-
ject of much debate on empirical grounds. For ex-
ample, Spraos (1980) recognized that the theoretical
validity of the Prebisch-Singer hypothesis based on
labour market asymmetry is limited to the produc-
tion of labour-intensive commodities, such as tropi-
cal agricultural products, that are predominantly
produced in developing countries. Primary com-
modities produced in developed countries are not
typically subject to the same asymmetry due to the


existence of trade unions and alternative employ-
ment opportunities.


A further qualification to the Prebisch-Singer hy-
pothesis concerns extractive commodities such as
oil, gas, minerals and metals, the mode of extraction
of which is highly capital-intensive, often involving
foreign direct investment (FDI) and/or imported capi-
tal equipment from industrialized countries. In their
case, a relatively small proportion of the costs of pro-
duction is determined by local labour costs. Moreover,
the extractive sector can yield above-average profits
due to limited resource availability and diminishing
marginal productivity in the development of marginal
mines/oil wells, giving rise to higher market prices.
Therefore, over time, the terms of trade can turn in
favour of mineral and fuel commodities, which is in
line with Ricardo’s hypothesis (Ocampo and Parra-
Lancourt 2010). However, any improvement in NBTT
is counterbalanced by the rate of technical progress
in extractive industries, the income elasticity of de-
mand for these commodities and the development of
new and better quality manufactured goods.


Given the relatively long gestation periods in devel-
oping oil and gas fields or mining, episodes of strong
demand can lead to medium-run shortages which
allow scarcity or absolute rents to be earned even
in the least productive extraction areas (areas which
yield no differential rents), as prices rise above mar-
ginal costs (World Bank, 2000). A key policy issue
in the extractive sector is therefore the distribution
of differential and absolute rents14 between foreign
investors and developing-country governments, an
issue discussed in greater detail later in this report.


4. COMMODITy REVENuES
AS A DRIVER Of
DIVERSIfICATION


The canonical Lewis (1954) model of economic de-
velopment depicts developing countries as abundant
in unskilled labour but short of capital. External in-
jections of capital may set an economy on the road
to drawing ever more labour into manufacturing,
transforming from an agricultural/traditional into an
industrial/modern economy. Since in agrarian econ-
omies, capital goods need to be imported, the ex-
port earnings necessary to finance this transforma-
tion were traditionally highlighted as the engine of
growth. With developing countries having a compar-
ative advantage in the primary sector, this translated
into an emphasis on generating commodity earnings
to support the pursuit of economic diversification
and growth. In addition, exported commodities have
the advantages outlined in “vent-for-surplus” theory
(Myint, 1971), which suggests that large foreign
markets stimulate investment via the mobilization
of domestic resources that would otherwise remain
idle or underused.


A key policy issue
in the extractive
sector concerns
the distribution
of rents between
foreign investors
and developing-
country
governments.




12


COMMODITIES AND DEVELOPMENT REPORT


Proponents of this school of thought, such as John-
ston and Mellor (1961), maintain that as agriculture
is a relatively labour-intensive sector, it enables
countries to economize on scarce capital and im-
ports. It aids growth through several channels, pro-
viding cheap food, raw materials, employment, sav-
ings and demand for non-agricultural goods. More
broadly, agricultural growth is considered a key de-
terminant of food security and nutrition, poverty re-
duction and political stability. Food production for the
domestic market increases real wages and boosts
demand for incipient industries, and often has strong
linkages to industries and services in the areas of
agricultural inputs, as well as processing and trading
of food and fibres. These are industries that devel-
oping countries are often best placed to develop. A
good illustration of economic diversification in low-
income countries is the clothing and textile industry,
which took off in a ”flying geese”15 fashion, first in
the Republic of Korea and Thailand during the 1970s,
followed by Bangladesh in the 1980s, and then Viet
Nam and India in the 1990s and Cambodia in the
2000s.


In sum, because of important externalities, the ar-
gument was made that agriculture’s contribution to
growth is significantly larger than its share of GDP
would suggest. In a recent literature review of cross-
country studies that gauge the sectoral sources of
aggregate growth in LDCs, agricultural productivity
gains were seen to have the strongest linkages of all
sectors relative to growth in other sectors (Bezemer
and Headey, 2008).


Many of these advantages are relevant to domestic
agriculture, but do not accrue to commodity exports;
they refer to domestic linkages, employment and
food security effects as well as lower food prices and
higher real wages. In addition, there are well-known
drawbacks from export-led growth in general and
commodity-led growth in particular, both structural
(resource curse) and financial (commodity revenue
windfalls). The UNCTAD Trade and Development Re-
port (UNCTAD, 2010a) outlined a number of other
drawbacks of the export-led growth model for de-
veloping countries, particularly that it exposes them
to adverse international shocks and increases their
dependence on the international system. Moreover,
export-led growth in most developing countries has
failed to generate dynamic linkages within their
economies, partly due to TNCs and foreign owner-
ship of export activities, such as mining or planta-
tion agriculture, which tends to result in a transfer of
profits out of the exporting country.


Although the mining and minerals sector is of critical
economic importance for some CDDCs, in general
it has relatively low employment, and weak down-
stream and upstream linkages. Nonetheless, the
growth in world consumption of energy, metals and


mineral commodities that have fed infrastructure
and industrial growth has contributed significantly
to CDDCs’ export revenues during the recent boom
(UNCTAD, 2012a).


Structurally, dependence on primary sector earnings
may turn into a “resource curse” when it quells in-
centives to invest in the diversification of an econo-
my. Diversification – the development of the second-
ary and tertiary sectors – is a prerequisite for longer
term economic growth. A commodity boom may
hinder diversification by providing an easy source of
revenues, thereby discouraging investment in other
sectors where the immediate returns are likely to be
lower. And to the extent that commodity revenues
flow to domestic elites or foreign investors, it rein-
forces inequality and thus hampers growth. This is
a common occurrence in most countries with large
land inequalities that rely on the production and ex-
port of metals and minerals and food and fibres (de
Janvry, Sadoulet and Wolford, 1998; Lipton, 2009).


The short-term and direct effects of commodity
dependence can be positive for commodity export-
ers, at least in terms of average foreign exchange
inflows, and could, in principle, translate into de-
velopment benefits if the revenue windfalls were
to be used to diversify the economy. But the longer
term and indirect effects are mixed. On the negative
side, it has long been recognized that due to Engel’s
Law – which states that as nations grow richer, a
declining share of income is spent on food – coun-
tries that specialize in food production (and primary
output generally) are in effect “specializing in being
poor” (Reinert, 2008). The overwhelming share of
the world’s growth in value added is in the manu-
facturing and services sectors, with the primary sec-
tor showing a steadily declining share of global GDP.
Reflecting this, until recently non-oil commodity-
exporting LDCs have seen much steeper declines in
their terms of trade since the mid-1970s. However,
recent research suggests that this depends on the
kind of commodity and its level of sophistication
(World Bank, 2009a).


Meanwhile, the traditional response to declining
terms of trade was that CDDCs should attempt to
process more of their primary output in order to cap-
ture a greater share of the value added of the final
product. However, globalization has added a new
dimension, as value chains have become both more
fragmented and more internationalized, and control
by processer, trader and retailer multinationals of
the industrialized countries has extended upstream
in the value chain (see chapter 2 for a further discus-
sion of this issue).16 This has the potential to open up
some new opportunities in high value-added activi-
ties, such as in horticulture (e.g. the rapidly expand-
ing production of roses from Kenya and Ethiopia and
peas from Egypt); but it also decreases CDDCs’ pol-


As agriculture is a
relatively labour-


intensive sector, it
enables countries
to economize on


scarce capital
and imports.


For some
CDDCs, the
mining and


minerals sector
have low


employment,
and weak


downstream
and upstream


linkages.




13


cHapter I: Revisiting the “commodity pRoblem”


Structurally,
dependence on
primary sector
earnings may turn
into a “resource
curse” when it
quells incentives
to invest in
economic
diversification.


Indeed, the
resource “curse”
can become
a “blessing”
through
deployment of
resource rents
for enhancing
productive
capacity and
diversification.


icy space to shape value chains in their own inter-
ests through investment, subsidization and taxation
(Davis, 2006). Globalization and the role of the newly
emerging economies of Asia has also manifested it-
self in increased FDI in natural resource industries,
and in the purchase of productive resources such as
land, although the beneficial effects of these are less
clear or have yet to be proved (see chapter 4 for a
further discussion of this issue).


5. MANAgINg
COMMODITIES


5.1. Commodity revenues as a
“resource curse” revisited


Many countries that have a wealth of natural re-
sources have failed to grow more rapidly than those
without such resources – a phenomenon sometimes
referred to as the “natural resource curse” (Fran-
kel, 2010). This phenomenon has been borne out in
econometric tests of the determinants of economic
performance across a comprehensive sample of
countries. Frankel (2010) suggests six possible rea-
sons why natural resources might possibly lead to
sub-standard economic performance. These are: (i)
long-term trends in world commodity prices, (ii) ex-
cessive price volatility, (iii) crowding out of manufac-
turing, (iv) political instability (possibly leading to civil
war), (v) poor institutions, and (vi) the Dutch disease
(currency appreciation).


Similarly, Gylfason (2001) has highlighted four po-
tential reasons why natural resource abundance can
inhibit economic growth: (i) the Dutch disease (like
Frankel); (ii) failure to adequately address rent-
seeking behaviour, particularly in an environment
of weak governance and institutions; (iii) as natural-
resource-rich countries can live off their earnings for
extended periods of time, there are often reduced
public and private incentives to build human capi-
tal (education). This may result in too many people
being locked into low-skill, low-return natural-re-
source-based activities (e.g. agriculture or mining),
as well as low incentives to invest in education to
advance future earning power; and (iv) natural re-
source abundance may dampen incentives to save
and invest, thus leading to slow economic growth.
Each of these would depress growth, diversification
and economic development in the long run, in spite
of increased commodity revenues.


Nonetheless, one of the key factors that determine
whether a natural resource boom will be a “bless-
ing” or a “curse” appears to be the level of govern-
ance, particularly the existence of “sufficiently good
institutions” (Collier and Goderis, 2007). The main
“channels” of the curse are: (a) high public and pri-
vate consumption; (b) low and often inefficient in-


vestment; and (c) an overvalued (strong) currency
(Dutch disease). However, what is significant is that
all of these “channels” can be neutralized or ame-
liorated through appropriate policies and strategies.
Indeed, the resource “curse” can become a “bless-
ing” through deployment of the resource rents for
enhancing productive capacities and economic di-
versification.


Sceptics have questioned the natural resource curse
hypothesis, highlighting examples of commodity-
exporting countries that have done well and arguing
that resource endowments and booms are not exog-
enous. Frankel (2010) notes that better outcomes
may depend on the adoption of policies and insti-
tutions, and that some commodity producers have
tried to overcome the pitfalls of the “natural resource
curse” through various policies. These include the in-
dexation of oil contracts to global commodity prices,
hedging of export proceeds, denomination of debt
in terms of oil, Chile-style fiscal rules (see box 8),
a monetary target that emphasizes product prices
and transparent commodity funds (e.g. sovereign
wealth funds). Similarly, Van der Ploeg (2011) notes
that the empirical evidence suggests that either out-
come (“curse” or “blessing”) is possible. He surveys
a variety of hypotheses and supporting evidence for
why some countries benefit and others lose from
the presence of natural resources. Negative effects
arise if the resource bonanza induces appreciation of
the real exchange rate, deindustrialization and bad
growth prospects (Dutch disease effects).17 These
effects could therefore be overcome by improving
the institutional and legal environment.


An extension of the resource curse theory is that
a resource boom reinforces rent grabbing and civil
conflict, especially if institutions are poor. Moreover,
it may also induce corruption, especially in non-
democratic countries, and keep in place erroneous
policies (Van der Ploeg, 2011; Collier and Goderis,
2007). It remains a big challenge for resource-rich
developing economies to successfully convert their
depleting, exhaustible resources into other produc-
tive assets.


5.2. Extractive sectors:
ensuring an equitable
distribution of windfall
gains


A review of the literature on how best to avoid the
negative effects of the “natural resource curse” in
developing countries highlights some differences
between the extractive sector (dealt with in this
subsection) and the agricultural sector (addressed
in the next subsection). For example, in the extrac-
tive sector, some welfare-based fiscal rules are often
needed (that support incremental consumption to be




14


COMMODITIES AND DEVELOPMENT REPORT


paid with interest from sovereign wealth funds) for
harnessing resource windfall gains in developed and
developing economies (Van der Ploeg, 2011). For de-
veloping countries to ensure an equitable distribution
of gains from resource extraction, particularly where
FDI is involved, appropriate taxation and royalty poli-
cies should be implemented (UNCTAD, 2009a).


The World Bank (2009b) advocates progressive tax-
ation on profits as a means of securing an equitable
distribution of benefits, but highlights that the choice
of fiscal regime needs to take into consideration the
administrative and auditing capacity of government
entities. A tax on profits creates incentives for TNCs
to overstate operating costs through transfer pricing
which can be difficult for host governments to verify,
especially when regulatory capabilities are limited.
Transfer pricing/overstated costs often arise when
reported transactions do not take place on an arm’s-
length basis but with related parties. Related party
costs can take various forms, including exaggerated
maintenance expenses, imported input costs and
consultancy services. Through such activities, TNCs
can potentially manipulate and declare profits in ju-
risdictions where overall tax liabilities are relatively
low (Strange, 1996; UNCTAD, 1999). For example, in
2009 the Zambian Ministry of Finance and National
Planning initiated a review of the tax regime on min-
ing and an audit of mining firms due to a lack of rea-
sonable income from the mines. The audit revealed
high levels of tax evasion through under-invoicing
and transfer pricing. All of the audited mines were
found to have underpaid, and were required to pay
outstanding balances to the Government (Kopulande
and Mulenga, 2011). In addition, and as a result, the
windfall tax was repealed and replaced by a 15 per
cent variable tax on revenue (Lungu, 2009).18


In contrast to taxation on profits, a tax in proportion to
the value of resource extraction – effectively a produc-
tion tax – may be implemented which requires lower
institutional capabilities and regulatory costs, and
leaves less scope for tax evasion. Land (2009) notes
that production and export taxes are regressive taxes.
This means that the tax rate, as a percentage of total
profits is relatively higher for mining companies that
have higher per unit extraction costs than for more
profitable companies that use superior technology
and capital equipment and/or for operating mines that
have higher ore grades.19 Production taxes effectively
provide a positive incentive for mining companies to
invest in capital and improve methods of production,
as any surplus profits earned (relative to other com-
panies operating mines of similar ore grade) will be
retained by the company rather than be taxed at a
higher rate as with progressive taxation.


On the downside, production taxes also mean that
mining companies may retain surplus profits which
are not derived from capital invested or superior


technological capability, but from natural advan-
tages arising from the relatively higher ore grade
of the mine(s) which they operate. A potential policy
implication is that more productive mines could be
leased to companies at higher prices, or discrimi-
nately higher production taxes could be applied. A
discriminatory production tax based on mine pro-
ductivity effectively ensures that any differentials in
the profit earned by mining companies arise purely
as a result of differentials in capital investment and
technological capabilities, and not as a result of the
natural characteristics of the resource.


In combination with discriminatory production taxes, an
export tax may also be considered, as it encourages do-
mestic processing and manufacturing of the extracted
commodity on condition that export taxes are lower or
non-existent on exports of manufactures. An export tax
can effectively form part of a development programme
of diversification into downstream industries. Further-
more, export taxes are not prohibited by the WTO, and
if applied by a large country or collectively by a num-
ber of producing countries, which together have a sig-
nificant share of world production of a particular com-
modity, this will raise the world price of the underlying
commodity and improve the country’s terms of trade
(Piermartini, 2004). This improvement in the terms of
trade arises because the application of an export tax
often renders exports from more marginal mining areas
unprofitable, resulting in reduced exports and higher
world prices,20 thereby benefiting the major exporting
countries.21 The collective application of a predeter-
mined export tax also avoids a “race to the bottom” in
offering favourable tax regimes for TNCs at the expense
of government revenues. Higher taxes and royalties go-
ing towards infrastructure and education, for example,
not only support domestic economic development, but
also improve the image of foreign investors and reduce
potential political risks inherent in long-term FDI (e.g.
government nationalization or confiscation), as they
contribute towards win-win outcomes.


In addition, some countries have introduced a re-
source rent tax on supernormal profits, especially
those resulting from spikes in export prices, and
placed the proceeds in a special fund to finance fu-
ture development measures. Such a tax has been
used successfully by Botswana, for example, in rela-
tion to its diamond revenues.


5.3. Agriculture: securing
commodity rents


In contrast to the extractive industries, the ability
of developing countries to obtain rents from tropi-
cal agricultural production is decreasing. There are
growing concerns about unequal exchange, as
small, fragmented producers of tropical agricul-
tural products increasingly trade within highly con-


The choice of
fiscal regime


needs to take into
consideration the


administrative
and auditing


capacity of
government


entities.




15


cHapter I: Revisiting the “commodity pRoblem”


centrated value chains dominated by multinational
buyers.22 As a result, farmers’ incomes are often at
subsistence levels. In addition they face price volatil-
ity and an increasing complexity of public and pri-
vate standards, on the one hand, and the challenge
of trying to bring together the necessary technical
upgrading, collective action and access to work-
ing capital for their participation in modern supply
chains, on the other. In most CDDCs, small-scale ag-
riculture, which supports the livelihoods of the ma-
jority of the rural poor, is often poorly placed to adjust
to these changes. Indeed, food subsidy policies and
variations in transport and storage costs and in the
profit margins of food value chains are among the
factors that result in an incomplete pass-through of
international prices to domestic food prices (Ghosh,
2009).23 Moreover, in Benin, Ethiopia, Malawi and
Sierra Leone, for example, consumer subsidies were
slashed at the instigation of the International Mon-
etary Fund (IMF), causing domestic prices of food
and fuel to rise further than elsewhere (Van Waeyen-
berge, Bargawi and McKinley, 2010).


The argument that farmers will reduce supply in re-
sponse to low prices is difficult to sustain in a con-
text where alternative employment offering a higher
income is not available. Kaplinsky (200) discusses
this asymmetry in market power in coffee and co-
coa value chains, where producers have become
increasingly fragmented following structural adjust-
ment programmes. Farmers must now exchange with
near-monopoly or oligopsonistic commodity traders,
exporters and agents. One example among many, is
that of Côte d’Ivoire, where Wilcox and Abbot (2004)
found that cocoa exporters had gained considerable
market power and obtained excessive rents from pro-
ducers resulting in lower farmgate prices. UNCTAD
(2008) notes that, in relative terms, farmgate shares
of world cocoa prices increased in Ghana,24 while they
declined during the period 1985–2005 in Cameroon,
Côte d’Ivoire and Nigeria. The likely cause of declin-
ing farmgate shares is reported to be the emergence
of backward integration in the value chain by large
transnational commodity exporters that have filled
the gap previously occupied by government mar-
keting boards. Farmers in more remote areas were
found to be the most vulnerable to abuse by market
(buyer) power (UNCTAD, 2008). A little-researched, yet
important sign of market power (although not solely
due to TNCs) is where farmgate prices are not uniform
but subject to significant regional and country differ-
ences beyond what could be attributed to variations
in export tax regimes.25 This gives rise to the possi-
bility of discriminatory oligopsony/monopsony posi-
tions, whereby multinational commodity buyers reap
higher returns from differentials in land productivity
and surplus labour by purchasing at lower farmgate
prices (either directly or via intermediaries) in regions/
countries where the marginal costs of production are


lower, thereby effectively capturing the differential Ri-
cardian rents from producers.


6. ThE COMMODITy
PRObLEM: SOME
PRELIMINARy VIEwS


The terms of trade of resource-rich economies in-
creased during the period 2003–2008, but largely
due to the external factor of rising commodity pric-
es rather than domestic policies (Frankel, 2010).
It is often argued that the increased openness to
trade, investments and capital flows of the 2000s
(compared with the 1980s and the 1990s) placed
resource-rich economies in a better position than
previously to capture and capitalize on the increased
inflows. However, from recent experience, openness
may increase the size of inflows, but not necessarily
improve their utilization. Indeed, it may even have
potentially adverse consequences for some CDDCs.


What determines whether countries manage to use
commodity windfall incomes effectively? Currently, the
most conventionally favoured response to this ques-
tion looks to country-specific factors. If developing
countries have “good institutions” – a catchall phrase
for little corruption, accountable business governance
structures, law and order, responsible macroeconomic
policies, and preferably, a “democracy” – they are per-
ceived as possessing a better investment climate, in-
cluding for international inflows. For example, Obstfeld
(2009) identifies prudent macroeconomic policies and
stable property rights as the key conditions that enable
countries to benefit from financial openness. Emerging
from the conclusion of this argument is a set of policy
recommendations for LDCs which remain the staple of
post-Washington Consensus IMF policy packages.


A second response refers to the resource curse dis-
cussed above, and highlights the need to recognize
the unintended financial repercussions of capital in-
flows. Even where corruption is absent, governments
are democratic and business transparent, capital
inflows may cause Dutch disease-related currency
appreciation, push up domestic interest rates, lead
to procyclical government spending, cause asset
bubbles and destabilize the economy upon reversal.


The third response is to call this very desirability into
question, and to ascribe the cause of inflow prob-
lems to the international financial system and to in-
dividual countries. It views rising commodity prices
as one symptom of a broader trend of growth in mar-
kets for financial assets and wealth at the cost of
growth in output and productivity. Rising commodity
prices also tend to attract more speculative invest-
ments globally (involving futures and index funds),
and more financial – rather than real-sector – in-
vestment which further increases volatility (a propo-
sition explored in chapter 2).


Food subsidy
policies and
variation in
transport and
storage costs
and in the profit
margins of food
value chains
are among the
factors that result
in an incomplete
pass-through
of international
prices to
domestic prices.




16


COMMODITIES AND DEVELOPMENT REPORT


It is questionable as to whether the conventional dis-
tinction between developed and developing coun-
tries, where the former import commodities and ex-
port manufactures and the latter does the inverse, is
still relevant in an increasingly interdependent global
economy. The international commodity trap is likely
to persist in the context of finance- driven globaliza-
tion, the oligopolistic power of TNCs and the growing
integration of global production systems, with manu-
factures being generated in both the North and the
South, which represent (or have created) new forms
of global interdependence. A major implication of
this is that CDDCs need to enhance South-South
cooperation efforts in addition to capacity-building
initiatives to foster their participation in international
trade, such as Aid for Trade, product diversification,
and higher value addition. Critically, CDDCs will need
to improve the competitiveness of their traditional
commodity sectors, support vertical and horizontal
diversification, and mitigate the short-term impact
of commodity price shocks. The United Nations can
play a wider role in developing innovative thinking
in this area and coordinating the work of reform of
individual commodity value chains. To provide ur-
gent relief in the event of a significant price shock,
a related reform should take the form of a quick-


disbursing global countercyclical financing facility to
support CDDCs, particularly LDCs.


Recent developments in the international finan-
cial architecture in a context of shrinking “policy
space” for CDDCs probably render outdated the
idea espoused by early development economists
that commodity exports may kick-start economic
diversification.26 Indonesia in the 1960s and 1970s
was still able to grow its rural economy and then
diversify, based on profits from its crude oil indus-
try. However, during the 2000s it was unable to
benefit in a similar way from the boom in palm oil
and other commodities in which it has a leading
position (World Bank, 2011). The main reason for
this may be the completely different international
financial system that had evolved, as it discovered
during the 1997-1999 Asian financial crisis (dis-
cussed further in chapter 4).


The commodity problem is even more relevant to-
day than before, owing to the complexities associ-
ated with an increasingly globalized world, greater
volatility of commodity prices, the financialization of
commodity markets and the reduced scope for com-
modity exports to actively promote economic diver-
sification in CDDCs.


The international
commodity trap


is likely to persist
in the context of


finance- driven
globalization,


the oligopolistic
power of TNCs


and the growing
integration of


global production
systems.




17


refereNces


Abbott PH, Wilcox M and Muir WA (2005). Corporate social responsibility in international cocoa trade. Paper prepared for presentation
at the 15th Annual World Food and Agribusiness Forum, Symposium and Case Conference, Chicago, Illinois, June 25-28, 2005.


Ardeni PG and Wright B (1992). The Prebisch-Singer Hypothesis: A reappraisal independent of stationarity hypothesis. The Economic
Journal, 102(413): 803–812.


Bezemer D and Headey D (2008). Agriculture, development and urban bias. World Development, 34: 1342–1364.


Bleaney and Greenaway (1993). Long-run trends in the relative price of primary commodities and in the terms of trade of developing
countries. Oxford Economic Papers, 45.


Brunnschweiler CN and Bulte EH (2008). The resource curse revisited and revised: A tale of paradoxes and red herrings. Journal of
Environmental Economic Management, 55: 248–264.


Cashin P and McDermott J (2002). The long-run behavior of commodity prices: Small trends and big variability. IMF Staff Papers,
49(2): 175–199.


Collier P and Benedikt G (2007). Commodity prices, growth, and the natural resource curse: Reconciling a conundrum. CSAE
Working Paper, CSAE WPS/2007-15, Centre for the Study of African Economies, Oxford.


Cuddington and Urzúa (1989). Trends and Cycles in the Net Barter Terms of Trade: A New Approach, The Economic Journal, Vol. 99,
No. 396, 426-442. 63.


Daviron B and Ponte S (2005). The Coffee Paradox: Global Markets, Commodity Trade and the Elusive Promise of Development.
London, Zed Books Ltd.


Davis GA (2008). Book review of Escaping the Resource Curse. Resources Policy, 33(4), December: 240–242.


Davis J (2006). How can the poor benefit from the growing markets for high value agricultural products? Available at: http://mpra.
ub.uni-muenchen.de/26048/.


de Janvry A, Sadoulet E and Wolford W (1998). From State-led to grassroots-led land reform in Latin America. Paper prepared for
the WIDER-FAO workshop on Access to Land, Santiago, Chile, 27–29 April 1998; Available at: http://www.unc.edu/~wwolford/
Geography160/UNWIDERlandreform.pdf.


Engel E (1857). Die Productions- und Consumtionsverhaltnisse des Königreichs Sachsen in Zeitschrift des Statistischen
Bureaus des Königlich-Sächsischen, des statistique, tome IX, premiere livraison, Rome 1895 Belgischer Arbeiter
Familien frfther und jetzt Bulletin de l’institut international deInnern, No. 8 u. 9, pp1-54 (reprinted as an appendix to Die
LebenskostenMinisterium).


Erten B and Ocampo JA (2012). Super-cycles of commodity prices since the mid-nineteenth century. DESA Working Paper
No. 110ST/ESA/2012/DWP/110, United Nations Department of Economic and Social Affairs, New York.


Farooki M and Kaplinsky R (2012). The Impact of China on Global Commodity Prices. Oxford and New York, Routledge.


FAO et al. (2011). Price Volatility in Food and Agricultural Markets: Policy Responses. Policy Report with including contributions from
FAO, IFAD, IMF, OECD, UNCTAD, WFP, the World Bank, the WTO, IFPRI and the UN HLTF. Rome.


Frankel JA (2010). The natural resource curse: A survey. NBER Working Papers, 15836, National Bureau of Economic Research,
Cambridge, MA.


Furtado C (1970). Economic Development of Latin America: A Survey from Colonial Times to the Cuban Revolution (1970), 2nd edition
2003. Cambridge, Cambridge University Press.


Ghosh J (2010). The unnatural coupling: Food and global finance. Journal of Agrarian Change Symposium on World Food Crisis,
January.


Gore C (2003). Globalization, the international poverty trap and chronic poverty in the Least Developed Countries. CPRC Working
Paper No. 30. Available at SSRN: http://ssrn.com/abstract=1754435 or http://dx.doi.org/10.2139/ssrn.1754435


Grilli E and Maw Cheng Yang (1988). Primary commodity prices, manufactured goods prices, and the terms of trade of developing
countries: What the long run shows. World Bank Economic Review, 2(1): 1–47.


Guillaumont P (1999). Assessing the economic vulnerability of small island developing states and the least developed countries.
Journal of Development Studies, 46: 828–854.


cHapter I: Revisiting the “commodity pRoblem”




18


COMMODITIES AND DEVELOPMENT REPORT


Gylfason Thorvaldur (2001). Natural resources and economic growth: What is the connection? CESifo Working Paper No. 530,
Center for Economic Studies and Ifo Institute for Economic Research. University of Munich.


ITC (2011). LDCs terms of trade during crisis and recovery. ITC Trade Map Factsheet #3; available at: http://www.intracen.org/.


Johnston BF and Mellor JW (1961). The Role of Agriculture in Economic Development. American Economic Review, 51(4): 566–593.


Kaldor N (1963). Capital accumulation and economic growth. In: Lutz FA and Hague DC, eds. Proceedings of a Conference held by
the International Economics Association. London, Macmillan: 177–222.


Kaldor N (1966). Causes of the Slow Rate of Economic Growth in the United Kingdom. Cambridge, Cambridge University Press.


Kaplinsky R (2004). Competition Policy and the Global Coffee and Cocoa Value Chains: United Nations Conference for Trade and
Development; available at: http://www.acp-eu-trade.org/library/files/Kaplinsky-Raphael_EN_052005_IDS_Competition-
policy-and-the-global-coffee-and-cocoa-value-chains.pdf


Kaplinsky R (2006). Revisiting the revisited terms of trade: Will China make a difference? World Development, 34(6): 981–995.


Killick T (2004). Politics, evidence and the new aid agenda. Development Policy Review, 22(1): 5–29; available at: http://ssrn.com/
abstract=513441.


Kindleberger C P (1950). The Dollar Shortage. New York, Willey.


Kindleberger CP (1956). The Terms Of Trade: European Case Study. New York, John Wiley & Sons.


Kopulande S and Mulenga C (2011). Impact of South-South cooperation and integration on the Zambian economy: The case of
Chinese investment. Lusaka, Zambian International Trade & Investment Centre (unpublished).


Land B (2009). Capturing a fair share of fiscal benefits in the extractive industry. Transnational Corporations, 18(1): 157-172.
UNCTAD, Geneva.


Lederman D and Maloney WF, eds. (2007). Natural Resources: Neither Curse nor Destiny. Washington, DC, IBRD/World Bank and
Palo Alto, CA, Stanford University Press.


Lewis AW (1954). Economic development with unlimited supplies of labour. Manchester School of Economics and Social Studies
22:139-191; also available at: http://www.globelicsacademy.net/2008/2008_lectures/lewis%20unlimited%20labor%20
supply%201954.pdf.


Lipton M (2009). Land Reform in Developing Countries: Property Rights and Property Wrongs. Oxford, Taylor and Francis.


Lungu J (2009). The politics of reforming Zambia’s mines tax regime. Resource Insight, 8. Johannesburg, South Africa Resource
Watch.


Maizels A (1992). Commodities in Crisis: The Commodity Crisis of the 1980s and the Political Eocnomy of International Commodity
Policies. Oxford, Clarendon Press.


McMillan MS and Rodrik D (2011). Globalization, structural change and productivity growth. NBER Working Paper No.  17143,
National Bureau of Economic Research, Cambridge, MA.


Myint H (1971). Economic Theory and the Underdeveloped Countries. New York, Oxford University Press.


Myrdal G (1957). Economic Theory and Underdeveloped Regions. London, Gerald Duckworth.


Obstfeld M (2009). International finance and growth in developing countries: What have we learned? IMF Staff Papers 56(1).
Washington, DC, International Monetary Fund.


Ocampo JA and Parra-Lancourt M (2010). The terms of trade for commodities since the mid-nineteenth century. Revista de Historia
Económica - Journal of Iberian and Latin American Economic History, 28(1): 11-43.


OECD-FAO (2008). Agricultural Outlook 2008–2017. Paris and Rome.


Pfaffenzeller et al. (2007). A short note on updating the Grilli and Yang Commodity Price Index. World Bank Econonomic Review,
21(1): 151-163. Washington, DC.


Piermartini R (2004). The Role of Export Taxes in the Field of Primary Commodities, World Trade Organization Discussion Papers.
Geneva, WTO.


Porter RC (1970). Some implications of post-war primary product trends. Journal of Political Economy, 78: 586-597.


Powell A (1991). Commodity and developing countries terms of trade: What does the long-run show? The Economic Journal, 101:
1485–1496.




19


Prebisch R (1964). Towards a New Trade Policy for Development. New York, United Nations.


Prebisch R (1950). The Economic Development of Latin America and Its Principal Problems. New York, United Nations.


Reinert ES (2007). How Rich Countries got Rich… and Why Poor Countries stay Poor. London, Constable; New York, Public Affairs;
Delhi, Anthem; Penang, Third World Network.


Ricardo D (1815). An essay on the Influence of a low price of corn on the profits of stock; showing the inexpediency of restrictions
on importation: With remarks on Mr Malthus’ two last publications: “An Inquiry into the Nature and Progress of Rent;” and “The
Grounds of an Opinion on the Policy of restricting the Importation of Foreign Corn.” London, John Murray.


Rodrik D (1997). Globalization, social conflict and economic growth. Eighth Raúl Prebicsh Lecture, delivered at the Palais des
Nations, Geneva, 24 October 1997, UNCTAD.


Sachs J and Warner A (1997). Natural resource abundance and economic growth. Working Paper, Center for International
Development and Harvard Institute for International Development, Harvard University, Cambridge MA.


Sapsford D (1985). The statistical debate on the net barter terms of trade between primary commodities and manufactures:
A comment and some additional evidence. Economic Journal, 95: 781–788.


Singer HW (1950). U.S. foreign investment in underdeveloped areas: The distribution of gains between investing and borrowing
countries. American Economic Review, Papers and Proceedings, 40: 473–485.


Smith A (1776). An Enquiry into the Nature and Causes of the Wealth of Nations. Edinburgh, Black.


Spraos J (1980). The statistical debate on the net barter terms of trade between primary commodities and manufactures.
The Economic Journal, 90(357): 107–128.


Strange S (1996). The Retreat of the State: The Diffusion of Power in the World Economy. New York, Cambridge University Press:
60–65.


Taylor L (1979). Macro Models for Developing Countries. New York, McGraw-Hill.


Thirlwall AP and Bergevin J (1985). Trends, cycles and asymmetries in the terms of trade of primary commodities from developed
and less developed countries, World Development, 13(7): 805–817.


Toye J (2000). Keynes on Population. Oxford, Oxford University Press.


Toye J and Toye R (2004). The UN and global political economy: Trade, finance and development. United Nations Intellectual History
Project Series, Chapter 5. New York, United Nations.


UNCTAD (1982). Trade and Development Report 1982. New York and Geneva, United Nations.


UNCTAD (1999). World Investment Report 1999: Foreign Direct Investment and the Challenge of Development. New York and
Geneva, United Nations.


UNCTAD (2002). Trade and Development Report 2002: Developing Countries in World Trade. New York and Geneva, United Nations.


UNCTAD (2003). Economic Development in Africa: Trade Performance and Commodity Dependence (UNCTAD/GDS/AFRICA/2003/1),
sales no. E.03.II.D.34. United Nations, New York and Geneva.


UNCTAD (2004). Least Developed Countries Report: Linking International Trade with Poverty Reduction. New York and Geneva,
United Nations.


UNCTAD (2007b). EconomicDevelopmentinAfrica:ReclaimingPolicySpace–DomesticResourceMobilizationandDevelopmental
States. United Nations publication, sales No. E.07.II.D.12. New York and Geneva.


UNCTAD (2008). Addressing The Global Food Crisis: Key Trade, Investment and Commodity Policies in Ensuring Sustainable Food
Security and Alleviating Poverty. UNCTAD/OSG/2008/1. Geneva.


UNCTAD (2009a). Enhancing the Role of Domestic Financial Resources in Africa’s Development : A Policy Handbook. UNCTAD/ALDC/
AFRICA/2009/1. Geneva.


UNCTAD (2009b). UNCTAD, Handbook of Statistics, 2009; available at: www.unctad.org/statistics/handbook.


UNCTAD (2010a). TradeandDevelopmentReport2010:Employment,GlobalizationandDevelopment. New York and Geneva, United
Nations.


UNCTAD (2010b). Least Developed Countries Report 2010: Towards a New International Development Architecture for LDCs. New
York and Geneva,. United Nations.


cHapter I: Revisiting the “commodity pRoblem”




20


COMMODITIES AND DEVELOPMENT REPORT


UNCTAD (2011). PriceFormationinFinancializedCommodityMarkets:TheRoleofInformation. (UNCTAD/GDS/2011/1). New York
and Geneva, United Nations.


UNCTAD (2012a). Recent Developments in Key Commodity Markets: Trends and Challenges (TD/B/C.I/MEM.2/19). Geneva.


UNCTAD (2012b). State of Commodity Dependence and Development. (UNCTAD/SUC/2011/8). New York and Geneva, United Nations.


UNECA (2007a). Fostering agricultural transformation for food security, economic growth and poverty reduction in Africa. Addis
Ababa, United Nations Economic Commission for Africa. Paper prepared for the Twenty-sixth meeting of the Committee of
Experts, Conference of African Ministers of Finance, Planning and Economic Development/Fortieth session of the Commission,
Addis Ababa, 29 March–1 April 2007.


Van der Ploeg F (2011). Natural Resources: Curse or Blessing? Journal of Economic Literature, 49(2): 366–420.


Van Waeyenberge E, Bargawi H and McKinley T (2010). Standing in the way of development? A critical survey of the IMF’s crisis
response in low income countries. A Eurodad and Third World Network report in cooperation with the Heinrich Böll Foundation;
available at: http://twnside.org.sg/title2/finance/docs/n.papers/Standing.in.the.way.of.development_FINAL.PDF


Wilcox MD and Abbott PC (2004). Market Power and Structural Adjustment: The Case of West African Cocoa Market Liberalization.
Paper presented at Agricultural & Applied Economics Association (AAEA) Annual Meeting Denver, Colorado, August 1-4, 2004.


World Bank (2000). Measuring and apportioning rents from hydroelectric power developments, Part 2, Discussion Paper No. 419,
World Bank, Washington, DC.


World Bank (2008). World Development Report: Agriculture and Rural Development. Washington, DC; available at: http://www.
worldbank.org/WDR2008.


World Bank (2009a). Global Economic Prospects: Commodities at the Crossroads. Washington, DC.


World Bank (2009b). Extractive industries value chain – A comprehensive integrated approach to developing extractive industries.
Extractive Industries for Development Series No. 3, Africa Region Working Paper Series No. 125, March 2009. (Author: Eleodoro
Mayorga Alba). Washington, DC.


World Bank (2011). National Oil Companies and Value Creation, Volume I – Case Studies. In: Tordo S, Tracy BS AND Afaa N, eds.
National Oil Companies and Value Creation. Washington, DC.


Young AA (1928). Increasing returns and economic progress. The Economic Journal, 38: 527–542.




21


Appendix 1.1. Commodity-dependent developing countries: Commodity exports as a percentage of merchandise
exports, 2009-2010


DEVELOPING ECONOMIES: AFRICA


Country Developing economies: East Africa %


Burundi* (071) Coffee and coffee substitutes, (074) Tea and mate, (971) Gold, non-monetary (excluding gold ores and concentrates). 91 CDDC


Comoros* (075) Spices, (971) Gold, non-monetary (excluding gold ores and concentrates), (03) Fishery products. 29 N


Djibouti* (022) Milk, cream and milk products (excluding butter, cheese), (001) Live animals other than animals of division 03, (971) Gold, non-monetary (excluding gold ores and concentrates). 85 CDDC


Eritrea* (001) Live animals other than animals of division 03, (03) Fishery products, (211) Hides and skins (except fur skins), raw. 46 N


Ethiopia* (071) Coffee and coffee substitutes, (054) Vegetables, (222) Oil seeds and oleaginous fruits (excluding flour). 90 CDDC


Kenya (074) Tea and mate, (292) Crude vegetable materials, n.e.s., (054) Vegetables. 65 CDDC


Madagascar* (03) Fishery products, (075) Spices, (287) Ores and concentrates of base metals, n.e.s. 50 N


Malawi* (121) Tobacco, unmanufactured; tobacco refuse, (074) Tea and mate, (061) Sugar, molasses and honey. 90 CDDC


Mauritius (03) Fishery products, (061) Sugar, molasses and honey, (667) Pearls, precious & semi-precious stones. 40 N


Mayotte (03) Fishery products, (288) Non-ferrous base metal waste and scrap, n.e.s., (111) Non-alcoholic beverages, n.e.s. 17 N


Mozambique* (684) Aluminium, (351) Electric current, (121) Tobacco, unmanufactured; tobacco refuse. 93 CDDC


Rwanda* (074) Tea and mate, (287) Ores and concentrates of base metals, n.e.s., (071) Coffee and coffee substitutes. 88 CDDC


Seychelles (03) Fishery products, (334) Petroleum oils or bituminous minerals > 70 % oil, (421) Fixed vegetable fats & oils, crude, refined, fractionated. 88 CDDC


Somalia* (001) Live animals other than animals of division 03, (971) Gold, non-monetary (excluding gold ores and concentrates), (24+25) Forestry products 99 CDDC


Uganda* (071) Coffee and coffee substitutes, (03) Fishery products, (121) Tobacco, unmanufactured; tobacco refuse 70 CDDC


United Republic
of Tanzania*


(971) Gold, non-monetary (excluding gold ores and concentrates), (289) Ores & concentrates of
precious metals; waste, scrap, (03) Fishery products. 83 CDDC


Zambia* (682) Copper, (283) Copper ores and concentrates; copper mattes, cement, (287) Ores and concentrates of base metals, n.e.s. 89 CDDC


Zimbabwe (284) Nickel ores & concentrates; nickel mattes, etc., (121) Tobacco, unmanufactured; tobacco refuse, (263) Cotton. 75 CDDC


Developing economies: Central Africa


Angola* (333) Petroleum oils, oils from bituminous materials, crude, (971) Pearls, precious & semi-precious stones, (334) Petroleum oils or bituminous minerals > 70 % oil. 100 CDDC


Cameroon (333) Petroleum oils, oils from bituminous materials, crude, (072) Cocoa, (334) Petroleum oils or bituminous minerals > 70 % oil. 89 CDDC


Central African
Republic*


(24+25) Forestry products, (971) Pearls, precious & semi-precious stones, (277) Natural abrasives,
n.e.s. (incl. industrial diamonds). 90 CDDC


Chad* (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (263) Cotton. 96 CDDC


Congo (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (24+25) Forestry products. 99 CDDC


Democratic
Republic of the
Congo*


(682) Copper, (287) Ores and concentrates of base metals, n.e.s., (283) Copper ores and
concentrates; copper mattes, cement. 96 CDDC


Equatorial
Guinea*


(333) Petroleum oils, oils from bituminous materials, crude, (343) Natural gas, whether or not
liquefied, (342) Liquefied propane and butane. 98 CDDC


Gabon (333) Petroleum oils, oils from bituminous materials, crude, (24+25) Forestry products, (287) Ores and concentrates of base metals, n.e.s. 96 CDDC


Sao Tome and
Principe*


(072) Cocoa, (334) Petroleum oils or bituminous minerals > 70 % oil, (057) Fruits and nuts
(excluding oil nuts), fresh or dried. 47 N


cHapter I: Revisiting the “commodity pRoblem”




22


COMMODITIES AND DEVELOPMENT REPORT


Appendix 1.1. Commodity-dependent developing countries: Commodity exports as a percentage of merchandise
exports, 2009-2010


Developing economies: North Africa


Algeria (333) Petroleum oils, oils from bituminous materials, crude, (343) Natural gas, whether or not liquefied, (334) Petroleum oils or bituminous minerals > 70 % oil. 99 CDDC


Egypt (334) Petroleum oils or bituminous minerals > 70 % oil, (343) Natural gas, whether or not liquefied, (333) Petroleum oils, oils from bituminous materials, crude. 58 N


Libyan Arab
Jamahiriya


(333) Petroleum oils, oils from bituminous materials, crude, (343) Natural gas, whether or not
liquefied, (334) Petroleum oils or bituminous minerals > 70 % oil. 97 CDDC


Morocco (03) Fishery products, (054) Vegetables, (272) Crude fertilizers (excluding those of division 56). 38 N


Sudan* (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (971) Gold, non-monetary (excluding gold ores and concentrates). 99 CDDC


Tunisia (333) Petroleum oils, oils from bituminous materials, crude, (421) Fixed vegetable fats & oils, crude, refined, fractionated, (334) Petroleum oils or bituminous minerals > 70 % oil. 26 N


Developing economies: Southern Africa


Botswana (667) Pearls, precious & semi-precious stones, (284) Nickel ores & concentrates; nickel mattes, etc., (011) Meat of bovine animals, fresh, chilled or frozen. 84 CDDC


Lesotho* (667) Pearls, precious & semi-precious stones. 31 N


Namibia (286) Ores and concentrates of uranium or thorium, (03) Fishery products, (667) Pearls, precious & semi-precious stones. 73 CDDC


South Africa (681) Silver, platinum, other metals of the platinum group, (321) Coal, whether or not pulverized, not agglomerated, (281) Iron ore and concentrates. 59 N


Swaziland (061) Sugar, molasses and honey, (098) Edible products and preparations, n.e.s., (24+25) Forestry products. 41 N


Developing economies: West Africa


Benin* (263) Cotton, (334) Petroleum oils or bituminous minerals > 70 % oil, (057) Fruits and nuts (excluding oil nuts), fresh or dried. 91 CDDC


Burkina Faso* (263) Cotton, (971) Gold, non-monetary (excluding gold ores and concentrates), (222) Oil seeds and oleaginous fruits (excluding flour). 94 CDDC


Cape Verde** (03) Fishery products, (112) Alcoholic beverages, (282) Ferrous waste, scrape; remelting ingots, iron, steel. 70 CDDC


Côte d’Ivoire (072) Cocoa, (334) Petroleum oils or bituminous minerals > 70 % oil, (333) Petroleum oils, oils from bituminous materials, crude. 85 CDDC


Gambia* (057) Fruits and nuts (excluding oil nuts), fresh or dried, (421) Fixed vegetable fats & oils, crude, refined, fractionated, (03) Fishery products. 82 CDDC


Ghana (072) Cocoa, (971) Gold, non-monetary (excluding gold ores and concentrates), (287) Ores and concentrates of base metals, n.e.s. 90 CDDC


Guinea* (285) Aluminium ores and concentrates (incl. alumina), (333) Petroleum oils, oils from bituminous materials, crude, (971) Gold, non-monetary (excluding gold ores and concentrates). 85 CDDC


Guinea-Bissau* (057) Fruits and nuts (excluding oil nuts), fresh or dried, (333) Petroleum oils, oils from bituminous materials, crude, (282) Ferrous waste, scrape; remelting ingots, iron, steel. 99 CDDC


Liberia* (231) Natural rubber & similar gums, in primary forms, (971) Gold, non-monetary (excluding gold ores and concentrates), (333) Petroleum oils, oils from bituminous materials, crude. 62 CDDC


Mali* (971) Gold, non-monetary (excluding gold ores and concentrates), (263) Cotton, (001) Live animals other than animals of division 05. 88 CDDC


Mauritania* (281) Iron ore and concentrates, (03) Fishery products, (333) Petroleum oils, oils from bituminous materials, crude. 100 CDDC


Niger* (286) Ores and concentrates of uranium or thorium, (001) Live animals other than animals of division 03, (334) Petroleum oils or bituminous minerals > 70 % oil. 68 CDDC


Nigeria (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (343) Natural gas, whether or not liquefied. 97 CDDC


Saint Helena (03) Fishery products, (321) Coal, whether or not pulverized, not agglomerated, (073) Chocolate, food preparations with cocoa, n.e.s. 68 CDDC


Senegal* (334) Petroleum oils or bituminous minerals > 70 % oil, (03) Fishery products, (971) Gold, non-monetary (excluding gold ores and concentrates). 66 CDDC




23


Appendix 1.1. Commodity-dependent developing countries: Commodity exports as a percentage of merchandise
exports, 2009-2010


Sierra Leone* (971) Pearls, precious & semi-precious stones, (285) Aluminium ores and concentrates (incl. alumina), (287) Ores and concentrates of base metals, n.e.s. 69 CDDC


Togo* (072) Cocoa, (272) Crude fertilizers (excluding those of division 56), (334) Petroleum oils or bituminous minerals > 70 % oil. 61 CDDC


DEVELOPING ECONOMIES: LATIN AMERICA AND THE CARIBBEAN


Developing economies: The Caribbean


Anguilla (112) Alcoholic beverages, (059) Fruit and vegetable juices, unfermented, no spirit, [684] Aluminium. 25 N


Antigua and
Barbuda


(091) Margarine and shortening, (334) Petroleum oils or bituminous minerals > 70 % oil, (03)
Fishery products. 10 N


Aruba (334) Petroleum oils or bituminous minerals > 70 % oil, (112) Alcoholic beverages, (122) Tobacco, manufactured. 95 CDDC


Bahamas (334) Petroleum oils or bituminous minerals > 70 % oil, (112) Alcoholic beverages, (03) Fishery products. 57 N


Barbados (333) Petroleum oils, oils from bituminous materials, crude, (112) Alcoholic beverages, (334) Petroleum oils or bituminous minerals > 70 % oil. 33 N


British Virgin
Islands not available.    


Cayman Islands (334) Petroleum oils or bituminous minerals > 70 % oil, (667) Pearls, precious & semi-precious stones, (321) Coal, whether or not pulverized, not agglomerated. 5 N


Cuba (284) Nickel ores & concentrates; nickel mattes, etc., (061) Sugar, molasses and honey, (122) Tobacco, manufactured. 77 CDDC


Dominica (057) Fruits and nuts (excluding oil nuts), fresh or dried, (273) Stone, sand and gravel, (054) Vegetables. 42 N


Dominican
Republic (122) Tobacco, manufactured, (057) Fruits and nuts (excluding oil nuts), fresh or dried, (072) Cocoa. 33 N


Grenada (046) Meal and flour of wheat and flour of meslin, (03) Fishery products, (075) Spices. 51 N


Haiti* (071) Coffee and coffee substitutes, (057) Fruits and nuts (excluding oil nuts), fresh or dried, (072) Cocoa. 12 N


Jamaica (285) Aluminium ores and concentrates (incl. alumina), (334) Petroleum oils or bituminous minerals > 70 % oil, (112) Alcoholic beverages. 83 CDDC


Montserrat (273) Stone, sand and gravel, (277) Natural abrasives, n.e.s. (incl. industrial. diamonds), (112) Alcoholic beverages. 50 N


Netherlands
Antilles


(334) Petroleum oils or bituminous minerals > 70 % oil, (335) Residual petroleum products, n.e.s.,
related materials, (971) Gold, non-monetary (excluding gold ores and concentrates). 83 CDDC


Saint Kitts and
Nevis


(112) Alcoholic beverages, (111) Non-alcoholic beverages, n.e.s., (022) Milk, cream and milk
products (excluding butter, cheese). 6 N


Saint Lucia (334) Petroleum oils or bituminous minerals > 70 % oil, (057) Fruits and nuts (excluding oil nuts), fresh or dried, (112) Alcoholic beverages. 63 CDDC


Saint Vincent
and the
Grenadines


(046) Meal and flour of wheat and flour of meslin, (057) Fruits and nuts (excluding oil nuts), fresh or
dried, (054) Vegetables. 23 N


Trinidad and
Tobago


(343) Natural gas, whether or not liquefied, (334) Petroleum oils or bituminous minerals > 70 % oil,
(333) Petroleum oils, oils from bituminous materials, crude. 73 CDDC


Turks and caicos
Islands


(03) Fishery products, (288) Non-ferrous base metal waste and scrap, n.e.s., (048) Cereal
preparations, flour of fruits or vegetables. 35 N


Developing economies: Central America


Belize (333) Petroleum oils, oils from bituminous materials, crude, (061) Sugar, molasses and honey, (059) Fruit and vegetable juices, unfermented, no spirit. 76 CDDC


Costa Rica (057) Fruits and nuts (excluding oil nuts), fresh or dried, (071) Coffee and coffee substitutes, (098) Edible products and preparations, n.e.s. 29 N


El Salvador (071) Coffee and coffee substitutes, (061) Sugar, molasses and honey, (048) Cereal preparations, flour of fruits or vegetables. 29 N


Guatemala (057) Fruits and nuts (excluding oil nuts), fresh or dried, (061) Sugar, molasses and honey, (071) Coffee and coffee substitutes. 59 N


cHapter I: Revisiting the “commodity pRoblem”




24


COMMODITIES AND DEVELOPMENT REPORT


Appendix 1.1. Commodity-dependent developing countries: Commodity exports as a percentage of merchandise
exports, 2009-2010


Honduras (071) Coffee and coffee substitutes, (057) Fruits and nuts (excluding oil nuts), fresh or dried, (03) Fishery products. 47 N


Mexico (333) Petroleum oils, oils from bituminous materials, crude, (971) Gold, non-monetary (excluding gold ores and concentrates), (334) Petroleum oils or bituminous minerals > 70 % oil. 25 N


Nicaragua (071) Coffee and coffee substitutes, (011) Meat of bovine animals, fresh, chilled or frozen, (03) Fishery products. 64 CDDC


Panama (03) Fishery products, (112) Alcoholic beverages, (057) Fruits and nuts (excluding oil nuts), fresh or dried. 9 N


Developing economies: South America


Argentina (081) Feeding stuff for animals (no unmilled cereals), (421) Fixed vegetable fats & oils, crude, refined, fractionated, (222) Oil seeds and oleaginous fruits (excluding flour). 67 CDDC


Bolivia (343) Natural gas, whether or not liquefied, (287) Ores and concentrates of base metals, n.e.s., (289) Ores & concentrates of precious metals; waste, scrap. 93 CDDC


Brazil (281) Iron ore and concentrates, (333) Petroleum oils, oils from bituminous materials, crude, (222) Oil seeds and oleaginous fruits (excluding flour). 63 CDDC


Chile (682) Copper, (283) Copper ores and concentrates; copper mattes, cement, (03) Fishery products. 89 CDDC


Colombia (333) Petroleum oils, oils from bituminous materials, crude, (321) Coal, whether or not pulverized, not agglomerated, (334) Petroleum oils or bituminous minerals > 70 % oil. 76 CDDC


Ecuador (333) Petroleum oils, oils from bituminous materials, crude, (057) Fruits and nuts (excluding oil nuts), fresh or dried, (03) Fishery products. 91 CDDC


Falkland Islands
(Malvinas)


(03) Fishery products, (268) Wool and other animal hair (incl. wool tops), (012) Other meat and
edible meat offal. 97 CDDC


Guyana (971) Gold, non-monetary (excluding gold ores and concentrates), (042) Rice, (061) Sugar, molasses and honey. 94 CDDC


Paraguay (222) Oil seeds and oleaginous fruits (excluding flour), (011) Meat of bovine animals, fresh, chilled or frozen, (081) Feeding stuff for animals (no unmilled cereals). 89 CDDC


Peru (971) Gold, non-monetary (excluding gold ores and concentrates), (283) Copper ores and concentrates; copper mattes, cement, (287) Ores and concentrates of base metals, n.e.s. 89 CDDC


Suriname (971) Gold, non-monetary (excluding gold ores and concentrates), (285) Aluminium ores and concentrates (incl. alumina), (03) Fishery products. 96 CDDC


Uruguay (011) Meat of bovine animals, fresh, chilled or frozen, (042) Rice, (268) Wool and other animal hair (incl. wool tops). 74 CDDC


Venezuela
(Bolivarian
Republic of)


(333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous
minerals > 70 % oil, (684) Aluminium. 91 CDDC


DEVELOPING ECONOMIES: ASIA


Developing economies: East Asia
China (incl. Macao
SAR, Hong-Kong
SAR and Taiwan,
Province of China)


(334) Petroleum oils or bituminous minerals > 70 % oil, (03) Fishery products, (971) Gold, non-
monetary (excluding gold ores and concentrates). 8 N


Korea, Dem.
People’s Rep of


(321) Coal, whether or not pulverized, not agglomerated, (281) Iron ore and concentrates, (334)
Petroleum oils or bituminous minerals > 70 % oil. 49 N


Korea, Republic of (334) Petroleum oils or bituminous minerals > 70 % oil, (682) Copper, (971) Gold, non-monetary (excluding gold ores and concentrates). 12 N


Mongolia (283) Copper ores and concentrates; copper mattes, cement, (971) Gold, non-monetary (excluding gold ores and concentrates), (287) Ores and concentrates of base metals, n.e.s. 96 CDDC


Developing economies: South Asia


Afghanistan* (057) Fruits and nuts (excluding oil nuts), fresh or dried, (292) Crude vegetable materials, n.e.s., (263) Cotton. 53 N


Bangladesh* (03) Fishery products, (264) Jute, other textile bast fibre, n.e.s., not spun; tow, (334) Petroleum oils or bituminous minerals > 70 % oil. 8 N


Bhutan* (351) Electric current, (075) Spices, (682) Copper. 51 N


India (334) Petroleum oils or bituminous minerals > 70 % oil, (667) Pearls, precious & semi-precious stones, (281) Iron ore and concentrates 43 N




25


Appendix 1.1. Commodity-dependent developing countries: Commodity exports as a percentage of merchandise
exports, 2009-2010


Iran (Islamic
Republic of)


(333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous
minerals > 70 % oil, (342) Liquefied propane and butane. 91 CDDC


Maldives** (03) Fishery products, (282) Ferrous waste, scrape; remelting ingots, iron, steel, (288) Non-ferrous base metal waste and scrap, n.e.s. 93 CDDC


Nepal* (054) Vegetables, (292) Crude vegetable materials, n.e.s., (075) Spices 31 N


Pakistan (042) Rice, (334) Petroleum oils or bituminous minerals > 70 % oil, (263) Cotton 25 N


Sri Lanka (074) Tea and mate, (667) Pearls, precious & semi-precious stones, (03) Fishery products 37 N


Developing economies: South-East Asia


Brunei Darussalam (333) Petroleum oils, oils from bituminous materials, crude, (343) Natural gas, whether or not liquefied, (334) Petroleum oils or bituminous minerals > 70 % oil 98 CDDC


Cambodia* (231) Natural rubber & similar gums, in primary forms, (971) Gold, non-monetary (excluding gold ores and concentrates), (273) Stone, sand and gravel 10 N


Indonesia (321) Coal, whether or not pulverized, not agglomerated, (422) Fixed vegetable fats & oils, crude, refined, fractionated, (343) Natural gas, whether or not liquefied 62 CDDC


Lao People’s
Democratic
Republic*


(682) Copper, (283) Copper ores and concentrates; copper mattes, cement, (351) Electric current. 81 CDDC


Malaysia (422) Fixed vegetable fats & oils, crude, refined, fractionated, (343) Natural gas, whether or not liquefied, (333) Petroleum oils, oils from bituminous materials, crude. 32 N


Myanmar* (343) Natural gas, whether or not liquefied, (24+25) Forestry products, (054) Vegetables. 78 CDDC


Philippines (682) Copper, (334) Petroleum oils or bituminous minerals > 70 % oil, (422) Fixed vegetable fats & oils, crude, refined, fractionated. 15 N


Singapore (334) Petroleum oils or bituminous minerals > 70 % oil, (971) Gold, non-monetary (excluding gold ores and concentrates), (112) Alcoholic beverages. 22 N


Thailand (334) Petroleum oils or bituminous minerals > 70 % oil, (03) Fishery products, (231) Natural rubber & similar gums, in primary forms. 29 N


Timor-Leste* (342) Liquefied propane and butane, (333) Petroleum oils, oils from bituminous materials, crude, (071) Coffee and coffee substitutes. 91 CDDC


Viet Nam (333) Petroleum oils, oils from bituminous materials, crude, (03) Fishery products, (042) Rice. 42 N


Developing economies: West Asia


Bahrain (334) Petroleum oils or bituminous minerals > 70 % oil, (684) Aluminium, (281) Iron ore and concentrates 74 CDDC


Iraq (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (971) Gold, non-monetary (excluding gold ores and concentrates). 99 CDDC


Jordan (272) Crude fertilizers (excluding those of division 56), (054) Vegetables, (971) Gold, non-monetary (excluding gold ores and concentrates). 27 N


Kuwait (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (342) Liquefied propane and butane. 91 CDDC


Lebanon (971) Gold, non-monetary (excluding gold ores and concentrates), (667) Pearls, precious & semi-precious stones, (282) Ferrous waste, scrape; remelting ingots, iron, steel. 39 N


Occupied
Palestinian
Territories


(421) Fixed vegetable fats & oils, crude, refined, fractionated, (273) Stone, sand and gravel, (122)
Tobacco, manufactured. 35 N


Oman (333) Petroleum oils, oils from bituminous materials, crude, (343) Natural gas, whether or not liquefied, (684) Aluminium. 80 CDDC


Qatar (333) Petroleum oils, oils from bituminous materials, crude, (343) Natural gas, whether or not liquefied, (342) Liquefied propane and butane. 91 CDDC


Saudi Arabia (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (342) Liquefied propane and butane 86 CDDC


Syrian Arab
Republic


(333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous
minerals > 70 % oil, (111) Non-alcoholic beverages, n.e.s. 67 CDDC


Turkey (334) Petroleum oils or bituminous minerals > 70 % oil, (971) Gold, non-monetary (excluding gold ores and concentrates), (057) Fruits and nuts (excluding oil nuts), fresh or dried. 22 N


cHapter I: Revisiting the “commodity pRoblem”




26


COMMODITIES AND DEVELOPMENT REPORT


Appendix 1.1. Commodity-dependent developing countries: Commodity exports as a percentage of merchandise
exports, 2009-2010


United Arab
Emirates


(333) Petroleum oils, oils from bituminous materials, crude, (667) Pearls, precious & semi-precious
stones, (971) Gold, non-monetary (excluding gold ores and concentrates). 75 CDDC


Yemen* (333) Petroleum oils, oils from bituminous materials, crude, (334) Petroleum oils or bituminous minerals > 70 % oil, (03) Fishery products. 97 CDDC


DEVELOPING ECONOMIES: OCEANIA


American Samoa (081) Feeding stuff for animals (no unmilled cereals), (263) Cotton, (03) Fishery products. 47 N


Cook Islands (667) Pearls, precious & semi-precious stones, (059) Fruit and vegetable juices, unfermented, no spirit, (03) Fishery products. 74 CDDC


Fiji (061) Sugar, molasses and honey, (03) Fishery products, (111) Non-alcoholic beverages, n.e.s. 77 CDDC


French Polynesia (667) Pearls, precious & semi-precious stones, (058) Fruit, preserved, and fruit preparations (no juice), (03) Fishery products. 76 CDDC


Guam (03) Fishery products, (282) Ferrous waste, scrape; remelting ingots, iron, steel, (071) Coffee and coffee substitutes. 28 N


Kiribati* (03) Fishery products, (422) Fixed vegetable fats & oils, crude, refined, fractionated, (289) Ores & concentrates of precious metals; waste, scrap. 85 CDDC


Marshall Islands (03) Fishery products, (334) Petroleum oils or bituminous minerals > 70 % oil, (422) Fixed vegetable fats & oils, crude, refined, fractionated. 25 N


Micronesia
(Federated States
of)


(03) Fishery products. 97 CDDC


Nauru (272) Crude fertilizers (excluding those of division 56), (335) Residual petroleum products, n.e.s., related materials, (03) Fishery products. 73 CDDC


New Caledonia (284) Nickel ores & concentrates; nickel mattes, etc., (281) Iron ore and concentrates, (03) Fishery products. 39 N


Niue (684) Aluminium, (334) Petroleum oils or bituminous minerals > 70 % oil, (269) Worn clothing and other worn textile articles. 2 N


Palau (03) Fishery products, (282) Ferrous waste, scrape; remelting ingots, iron, steel, (288) Non-ferrous base metal waste and scrap, n.e.s. 97 CDDC


Papua New Guinea (971) Gold, non-monetary (excluding gold ores and concentrates), (283) Copper ores and concentrates; copper mattes, cement, (333) Petroleum oils, oils from bituminous materials, crude. 98 CDDC


Samoa* (03) Fishery products, (422) Fixed vegetable fats & oils, crude, refined, fractionated, (112) Alcoholic beverages. 23 N


Solomon Islands * (24+25) Forestry products, (03) Fishery products, (422) Fixed vegetable fats & oils, crude, refined, fractionated 99 CDDC


Tokelau (042) Rice, (059) Fruit and vegetable juices, unfermented, no spirit, (057) Fruits and nuts (excluding oil nuts), fresh or dried. 26 N


Tonga (054) Vegetables, (292) Crude vegetable materials, n.e.s., (075) Spices. 80 CDDC


Tuvalu* (03) Fishery products, (684) Aluminium, (292) Crude vegetable materials, n.e.s. 33 N


Vanuatu* (03) Fishery products, (223) Oil seeds & oleaginous fruits (incl. flour, n.e.s.), (422) Fixed vegetable fats & oils, crude, refined, fractionated 85 CDDC


Wallis and Futuna
Islands


(072) Cocoa, (071) Coffee and coffee substitutes, (073) Chocolate, food preparations with cocoa,
n.e.s. 2 N


Source: UNCTAD,2012b; UNCTADstat (SITC Rev 3, 1 to 3 digit codes).


* LDCs.


** Cape Verde and Maldives graduated from LDC status in 2007 and 2011 respectively.


Note: CDDCs are defined as countries where total commodity exports account for more than 60 per cent of total merchandise
exports. Commodity exports for each country are reported as a percentage of total national merchandise exports in 2009-
2010, the latest years for which international trade statistics are currently broadly available.


n.e.s. = not elsewhere specified; N= non-CDDC.




27


NOTES
1. However, from the 1990s the debate on the terms of trade has increasingly revolved around the relative movement in the


prices of manufactures exported by developing countries vis-à-vis those exported by developed countries (UNCTAD, 2002).
Indeed, many primary-commodity-exporting developing countries, especially in Asia and Latin America, have shifted to
labour-intensive manufacturing. This choice is based on the belief that manufactured exports will enable these countries to
overcome the difficulties understood to arise as a result of an excessive dependence on commodity exports, and will thus allow
them to achieve higher rates of economic growth and development. Nevertheless, exports of manufactures from developing
countries are said to share the same characteristics as those of the primary commodity exports underlying the Prebisch-Singer
hypothesis, due to the fact that the income elasticity of demand for developing countries’ manufactured products is lower than
that of developed countries. This issue is important, since the shift from primary to manufactured exports could fail to solve the
declining terms of trade faced by developing countries.


2. Commodity-dependent developing countries (CDDCs), are defined as those developing countries and territories where total
commodity exports account for more than 60 per cent of total merchandise exports.


3. Indeed, as Davis (2008:240–242) maintains, “to state that resource-rich countries are made worse off for their resources relies
on comparison with the unmeasurable counterfactual. It suggests that the Congo, Angola and Nigeria would be doing just fine
if natural resources were not found and extracted on their soils.”


4. See appendix 1.1 for the list of developing countries that were commodity dependent in 2009.


5. The recent commodity boom period started in 2003, punctuated by a short but marked downturn in the second half of 2008,
before rallying in early 2009.


6. UNCTAD calculations based on UNCTADstat.


7. The UNCTAD concentration index, which is based on merchandise exports (excluding services), is computed using the
Herfindahl-Hirschmann index (HHI). The concentration index or Hirschman (H) index is calculated using the shares of all SITC
three-digit products in a country’s exports. Thus: Hj = sqrt [ ∑ (xi/Xt)2], where xi is country j’s exports of product i (at the three-
digit classification) and Xt is country j’s total exports. The index is normalized to account for the number of actual three-digit
SITC product categories that could be exported. The lower the index, the less concentrated are a country’s exports.


8. Primary commodities are defined as all foods (including basic foods, beverages and tobacco, agricultural products and oils); all
metals and minerals (ferrous and non-ferrous metals, precious stones and pearls); and all fuel (crude petroleum, natural gas
and other fuel commodities) (UNCTAD, Handbook of Statistics, 2009).


9. Measured in terms of gross national income (GNI) per capita (in PPP international dollars) during the period 2009–2010, West
Asian CDDCs had the highest average per capita income among all CDDCs, at $18,503, compared with South Asian CDDCs at
$8,133 and sub-Saharan African CDDCs at $4,470.


10. Kaldor (1966) emphasized the importance of generating a higher agricultural surplus, which requires agricultural labour’s
productivity growth to exceed the growth of labour’s own consumption requirements. A lack of agricultural surplus may
constrain non-agricultural growth from the demand side (demand deficiency) but also from the supply side by making the
system prone to food-price inflation, which: (i) erodes real wages of non-agricultural workers, reducing their consumption; (ii)
erodes industrial profits and hence investment ; and (iii) may lead to lower exports due to loss of cost competitiveness.


11. The double factoral terms of trade are the NBTT multiplied by the ratio of indices of labour productivity in the export sectors of
the trading partners. They effectively ensure that any changes in relative prices caused by changes in labour productivity are
netted out, giving a more accurate measure of gains/losses per unit of labour realized though trade.


12. Many firms use cost-plus pricing, also known as markup pricing. Typically a firm first calculates the cost of the product, then
adds a proportion of it as a markup.


13. For a fuller discussion of this issue in the context of flexible versus fixed pricing from a structuralist position, see Taylor (1979).
For example, an expansion of employment opportunities in CDDCs may result in an increase in demand for foodgrains. Given
that the prices of foodgrains are largely demand-determined (flexible price), this can cause wage costs to rise in response
to an increase in the cost of living. As the prices of most industrial goods are determined on a cost of production (fixed price)
basis, an increase in the wage cost causes prices of industrial goods to increase, thus giving rise to inflationary pressure on
the economy as a whole.


14. Differential rent, a term first used by Ricardo, refers to the rent arising from differences in the fertility of land. The surplus due
to the difference between the marginal and intra-marginal land is the differential rent. It is accrued generally under conditions
of extensive cultivation of land. As distinguished from differential rent, absolute rent does not depend on differences in fertility,
in the locations of various natural resources (land or mine), or in the productivity of additional capital investments in a given


cHapter I: Revisiting the “commodity pRoblem”




28


COMMODITIES AND DEVELOPMENT REPORT


location. Private owners who legally own the natural resource allow this to be used only in return for compensation, which
they receive in the form of rent. The owner collects rent from any natural resource, even the least productive one, if a demand
to utilize it arises.


15. The flying geese paradigm characterizes the international division of labour in East Asia based on dynamic comparative
advantages. According to this paradigm, industrial production would continuously move from the more advanced countries to
the less advanced ones. The less developed countries could be considered to be “aligned” successively behind the advanced
industrial countries in the order of their different stages of growth in the pattern of flying wild geese. The lead goose in this
pattern was Japan.


16. The value chain concept may be defined as the sequence of activities needed to produce and deliver a product or service.
This includes activities such as design, production, marketing, distribution and support to the final consumer. The value
chain not only pays attention to the different production and transformation stages, but also to the interactions between the
different actors involved in the chain. Value chain analysis considers the efficiency of the system holistically, which enables
the identification of bottlenecks within the chain that reduce overall competitiveness. The “global value chain” (GVC) concept
focuses on value chains that are divided among multiple firms and spread across wide geographical areas, whether regional
or international, rather than a single geographical location. The process of transforming goods and services from production to
final consumption involves linkages between the various sectors participating in that transformation process (UNECA, 2007).


17. Dutch disease was first identified in the Netherlands in the late 1950s and was very apparent in the United Kingdom in
the 1980s. These countries are generally viewed as stable, and their legal and financial systems and political institutions
are considered strong and highly developed. Therefore the issue for these countries relates more to policy, but for CDDCs
institutions also matter.


18. UNCTAD (2009a) outlines a range of policies that governments could adopt to enhance tax revenue collection, widen the tax
base and promote productive investment of commodity rents.


19. A higher ore grade means that the metal content of the ore is higher, which reduces per unit costs of producing the metal and
hence (all else being equal) yields larger profits for the mining company. Other natural sources of surplus mining profits include
a high concentration of the ore near the surface and a favourable mine location. Note that natural differences in extraction
costs also apply to oil and gas extraction.


20. This policy proposal has been advocated by the WTO (2004) and the terms of trade gain is well known in trade theory. The WTO
notes that “If a ‘large’ exporting country (or a group of small countries producing identical goods) levies an export tax, domestic
production will fall, thus exports will decline and the world price will increase” (WTO. 2004: 4).


21. A potential conflict between exporting countries is that mining operations in countries with relatively less productive mines will
experience greatly reduced production in the long run as a result of export taxes, resulting in unequal benefits from cooperative
export taxes.


22. Nevertheless, in agricultural value chains it is easier to shift supplier than in mineral value chains; in the latter, few alternative
suppliers exist, and firms must invest billions over many years to extract minerals.


23. The asymmetric pass through of changes in world food prices to developing countries’ domestic prices may also be partly
explained by competition, or a lack thereof.


24. It is worth noting that in Ghana the government marketing board, Cocobod, continues to operate. Cocobod maintains a
monopoly over cocoa bean exports and sets a floor on farmgate prices, effectively increasing farmers’ bargaining power
vis-à-vis traders.


25. For example in the case of cocoa, Abbott et al. (2005) find that, despite the fact that the export tax rate is the highest in Côte
d’Ivoire, the exporter markups by TNCs operating in the country are by far the highest relative to those in other cocoa producing
countries, with farmers receiving the lowest farmgate prices.


26. See UNCTAD (2007), which discusses the concept of policy space and the challenges that this poses to development, particularly
in Africa.





Chapter 2:


COMMODITy bOOM AND buST
IN hISTORICAL PERSPECTIVE:


NEw TwISTS


1. Commodity boom and bust in historical perspective ..................................................................................30


1.1. Overview of price trends, 1960–2011 ...........................................................................................30


2. The commodity booms of the 1970s and 2000s compared .......................................................................31


2.1. World industrial production ............................................................................................................32


2.2. United States exchange rates and global monetary conditions .....................................................34


2.3. Effect of changes in real exchange rates on commodity prices ......................................................36


3. New “twists” to the perennial commodity problem ....................................................................................39


3.1. Changing long-term demand patterns for commodities .................................................................39


3.2. Some policy responses..................................................................................................................56


References ..........................................................................................................................................................60




30


COMMODITIES AND DEVELOPMENT REPORT


1. COMMODITy bOOM AND
buST IN hISTORICAL
PERSPECTIVE


This chapter briefly traces the evolution of commod-
ity prices since the commodity boom of the 1960s.
It then examines the similarities and differences
between the recent boom of 2003–2011 and that
of the 1970s with a view to identifying any paral-
lels and lessons that could be learnt. This is followed
by a discussion of the “new twists” to commodity
boom-bust cycles, investigating in detail the extent
of financialization of commodity markets.


An important common element to the commod-
ity price booms in the 1970s and during the period
2003–2008 is that they coincided with periods of
real depreciation of the dollar and low global interest
rates. A particular feature and a “new twist” to the
recent boom is the increasing presence of financial
investors in commodity futures markets. During the
2000s, investment in commodity index funds has
been heavily concentrated in the buy (long) side of
those markets, and such a substantial influx of in-
vestment gives rise to futures price bubbles. These,
in turn, affect spot prices by altering price expec-
tations and providing incentives to hoard – a phe-
nomenon never evident before. Furthermore, ethanol
use as a proportion of world maize consumption has
increased sharply since 2003–2004, which is ef-
fectively diverting food and animal feedstock to fuel
production, resulting in higher maize prices. Also,
despite concerns raised about the potential impact


on commodity prices as a result of strong Chinese
demand for commodities, the analysis suggests that
during the period 2005–2010 China’s share of world
imports, although significant for several hard com-
modities, grew steadily, but was relatively small for
most soft commodities.


1.1. Overview of price trends,
1960–2011


Since 1960, the real prices of non-oil commodi-
ties had been relatively stable, but in 1974 they
peaked to their highest level (Figure 2.1) in parallel
with oil prices, and this was accompanied by an
oil shock. During the period 1980–2000, commod-
ity prices displayed some volatility, with temporary
peaks in 1988 and 1997, but overall they declined.1
However, the 1997–1999 Asian crisis contributed
to a slump in dollar-denominated prices of primary
commodities of 20 per cent (compared with 5 per
cent for manufactures) (Page and Hewitt, 2001).
By mid-2008, commodities had enjoyed a five-
year price boom – the longest and broadest rally
of the post-Second World War period after almost
30 years of generally low but moderately fluctu-
ating prices for each sub-period. Moreover, once
the prices had changed as a result of the two price
shocks, there is a tendency for them to remain at
their post shock level for the medium term. How-
ever, it has been relatively well established that
there is a long-term downward trend in the relative
prices of primary commodities vis-à-vis manufac-
tures (Maizels, 1992).


A new twist to
the 2003-2011


commodity boom
is the growing


presence of
financial investors


in commodity
futures markets.


By mid-2008,
commodities had


enjoyed a five
year price boom –
the longest since


1945.


Figure 2.1. Non-oil commodity price index in constant terms, 1960–2011 (2000 = 100)


0


50


150


200


250


300


350


01
-1


96
0


01
-1


96
3


01
-1


96
6


01
-1


96
9


01
-1


97
2


01
-1


97
5


01
-1


97
8


01
-1


98
1


01
-1


98
4


01
-1


98
7


01
-1


99
0


01
-1


99
3


01
-1


99
6


01
-1


99
9


01
-2


00
2


01
-2


00
5


01
-2


00
8


01
-2


01
1


Pr
ic


e
in


de
x


(2
00


0=
10


0)


Non-oil commodities’ constant price index
Linear (Non-oil commodities’] constant price index)


Average current price index
since 1960–2011


Average current price index
1980–2005


Average current price index
2006–2011


Average current price index
1960–1979


Source: UNCTAD secretariat calculations, based on UNCTADstat.




31


cHapter II: commodity boom and bust in histoRical peRspective: new twists


As is widely recognized, during this period, there have
been two major commodity price booms, one during
the course of 1973–1980 and the second from 2003
to 2011. The recent commodity price boom is differ-
ent from the previous one of the 1970s. For example,
it has been argued that the 1970s commodity price
spikes were short-lived (Radetzki 2006; Kaplinsky
and Farooki, 2009). The historical data also show that
significantly higher real prices of beverages and food
commodities were recorded in the 1970s as com-
pared with the period 2003–2011(see Appendix 1).2
However, the rise in commodity prices in the latter
boom, especially from 2006 to 2008, was particularly
pronounced in metals, crude oil and food (Figure 2.2).


Commodity price cycles are often asymmetric, with
boom periods generally shorter than bust cycles
(Page and Hewitt, 2001: 5). Moreover, Cashin, Mc-
Dermott and Scott (2002) show that the magnitude
of price slumps exceeds that of price rebounds dur-
ing subsequent booms (see also, UNCTAD, 2003).


Most studies accept that relative commodity prices
are non-stationary, with debate coalescing around
the issue of whether the trend is deterministic or
reflects structural breaks (Cashin, Liang and Mc-
Dermott, 1999: 3). From mid-2008 to 2009, as a
result of the global financial and economic crisis
most commodity prices plummeted as global growth
slowed down and consumer demand weakened in
most major economies. However, since then all com-
modity subgroups have rebounded strongly: for ex-


ample, in 2011 average prices of metals, agricultural
raw materials and beverages even surpassed 2008
averages (see Appendix 1).3 This appears to challenge
conventional arguments about the asymmetric nature
of commodity price cycles, and may be reflected by
the rising importance of “new twists” to the commod-
ity problem which play a critical role in changing long-
term demand patterns for commodities.


2. ThE COMMODITy bOOMS
Of ThE 1970S AND
2000S COMPARED


Commodity markets are characterized by price cy-
cles which can have grave macroeconomic conse-
quences for CDDCs and pose major challenges for
their policymakers. Such cycles usually have peri-
ods of short-lived boom followed by longer periods
of bust (for a detailed account of booms and busts,
see Cashin, McDermott and Scott, 2002). However,
the recent boom between 2003 and 2011 somewhat
reversed that trend. It was recorded as the longest in
the history of commodity price movements, and the
broadest, affecting almost all commodities – miner-
als and metals, energy and agricultural. At the begin-
ning of the boom, world prices rose gradually, but
the pace intensified between 2006 and 2007, and by
mid-2008 energy prices were 320 per cent higher
(in dollar terms) than in January 2003, metals and
minerals were 296 per cent higher and internation-
ally traded food prices 138 per cent higher.


Figure 2.2. Evolution of real price indices of commodities, 1960–2011


0


100


200


300


400


500


600


700


800


19
60


19
63


19
66


19
69


19
72


19
75


19
78


19
81


19
84


19
87


19
90


19
93


19
96


19
99


20
02


20
05


20
08


20
11


Food Tropical beverages Agricultural raw materials
Minerals, ores and metals Crude petroleum


Re
al


c
om


m
od


ity
p


ric
e


in
di


ce
s


(2
00


0=
10


0)


Source: UNCTAD secretariat calculations based on UNCTADstat.
Note: Data for 2011 cover the period January to June.
Note: To compute prices in constant terms, the deflator used is the unit value index of manufactured goods


exports by developed market-economy countries (United Nations Statistical Division).


Significantly
higher real prices
of beverages and
food commodities
were recorded
in the 1970s as
compared to the
2000s.


From mid-2008
to 2009, as a
result of the
global financial
crisis most
commodity prices
plummeted…
However,
since then all
commodity
subgroup prices
have rebounded
strongly.




32


COMMODITIES AND DEVELOPMENT REPORT


Prior to the 2003–2011 commodity boom, two major
commodity booms had occurred since the Second
World War. The first related to the Korean War in
1950, when insecurity about the supply of industrial
minerals prompted a widespread build-up of strate-
gic inventories and demand, causing prices to spike.
The second was spurred by strong macroeconomic
performance in 1972 and 1973 as well as two years
of crop failures that led to low inventories both for
food and agricultural raw materials (Radetzki, 2006).


The across-the-board increases in industrial com-
modity prices which preceded the increases in oil
prices in the 1970s were largely due to strong in-
dustrial growth and expansionary monetary policies
led by the United States beginning in 1971 which is
why it was not only oil prices that increased, but also
commodity prices more broadly (Barsky and Killian,
2002).4 5 Moreover, a common feature of the 1970s
and of recent boom cycles is the rise in private
capital flows to developing countries6 and emerging
market economies (e.g. the BRICS) which began un-
der conditions of rapid expansion of liquidity and low
interest rates in the major reserve-issuing countries,
particularly the United States (Akyuz, 2011; Morgan,
2011).7 The next subsection compares the follow-
ing elements of the 1970s and 2000s commod-
ity booms: world industrial production trends and
United States exchange rate and monetary policies.8


2.1. world industrial production
Growth in world industrial production during the
1970s compares favourably with the 2000s; on


average, world industrial growth between 1971 and
1980 was 3 per cent, while for the period 2001–2009
it averaged 1.9 per cent (Figure 2.3). Therefore, de-
spite the increasing importance of emerging market
economies, such as China and India, relative to the
high-income OECD countries as drivers of world in-
dustrial growth, world industrial growth has not out-
performed the 1970s. This is mainly because the rate
of growth of industrial output in the OECD countries
slowed significantly to near 0 per cent during the pe-
riod 2001–2009. And since these countries accounted
for an average of 66 per cent of global industrial value
added during the period 2005–2009, the rate of in-
dustrial growth in these countries continues to have
a more significant effect on world industrial growth
relative to other regions/countries. Latin America and
the Caribbean have also experienced a slowdown in
industrial growth since the 1970s. On the other hand,
sub-Saharan African countries have experienced a re-
bound in industrial output over the past decade after
a relatively poor performance in the 1980s and1990s.
However, their share in world industrial output is cur-
rently only 1 per cent.


The declining share of manufactures in GDP in the
OECD countries, from 25 per cent in 1980 to 15 per
cent in 2009 (Figure 2.4), suggests, inter alia, a
slowdown in industrial growth in these countries.
This reflects a relocation of manufacturing from
the developed countries to the newly industrializing
economies (NIEs) of East and South-East Asia. In
addition, this trend might have been influenced to
some extent by recent falls in the income elasticity
of demand for commodities (particularly for raw ma-


Since 2001,
there has been


a gradual
contraction in


industrial growth
in the high-


income OECD
countries.


Figure 2.3. Average annual growth rate of industrial value added, 1971–1980 to 2001–2009
(per cent)


0


2


4


6


8


10


12


14


16


1971-1980 1981-1990 1991-2000 2001-2009


An
nu


al
p


er
ce


nt
ag


e
gr


ow
th


World High income: OECD Latin America & Carribean Sub-Saharan Africa China India


Source: UNCTAD secretariat calculations based on World Bank, World Development Indicators database
(accessed: 20 June 2011; data on 2010 not available at time of writing).


Note: The World Development Indicators database does not include CDDCs as a group. Therefore, Latin
America and sub-Saharan Africa serve as proxies for CDDCs, while China and India separately serve
as proxies for emerging economies. Unfortunately, for the West Asia/North Africa region, since data are
available only until 2007, this group is not presented separately.




33


cHapter II: commodity boom and bust in histoRical peRspective: new twists


terials used in manufacturing), which has hindered
growth of the commodities sector.


In other regions as well the share of manufacturing
in GDP has been declining, though to varying ex-
tents, except in India where it has remained relative-
ly constant (Figure 2.4).Thus, the structural decline
of this sector’s share in GDP in OECD countries is not


being offset by its increase in the rest of the world.
As noted earlier, since OECD countries still account
for 66 per cent of world industrial production, if they
remain in stagnation, the BRICS alone clearly cannot
drive up commodity prices. However, the services
sector has begun to account for an increasing share
of world value added, from 56  per cent of GDP in
1980 to 70 per cent by 2008.9


Since 1980, a
structural decline
in manufacturing
share of GDP in
OECD countries
is not being offset
by its increase
in the rest of the
world.


Figure 2.4. Share of manufacturing in GDP, by country groups,1980–2009


Figure 2.5. Growth rate in world manufacturing value added and energy use 1970-1972
to 2006-2008 (3-year moving average)


10


15


20


25


30


35


40


45


19
80


19
81


19
82


19
83


19
84


19
85


19
86


19
87


19
88


19
89


19
90


19
91


19
92


19
93


19
94


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


Sh
ar


e
of


m
an


uf
ac


tu
rin


g
in


G
DP


(%
)


High income: OECD Latin America & Caribbean (all income levels)
Sub-Saharan Africa (all income levels) China
India


-2


0


2


4


6


8


10


19
70


-1
97


2


19
72


-1
97


4


19
74


-1
97


6


19
76


-1
97


8


19
78


-1
98


0


19
80


-1
98


2


19
82


-1
98


4


19
84


-1
98


6


19
86


-1
98


8


19
88


-1
99


0


19
90


-1
99


2


19
92


-1
99


4


19
94


-1
99


6


19
96


-1
99


8


19
98


-2
00


0


20
00


-2
00


2


20
02


-2
00


4


20
04


-2
00


6


20
06


-2
00


8


Energy use Manufacturing Value added (2005 constant USD)


Pe
r c


en
t


Source: UNCTAD secretariat calculations based on World Bank, World Development Indicators database
(accessed 30 June 2011).


Source: UNCTAD secretariat calculations, based on UNCTADstat for manufacturing value added, and on World
Bank, World Development Indicators database for energy use (accessed 8 December 2011).


Notes: The time window to which the moving average refers is centred on the year reported on the X-axis
(i.e. the 3-year moving average data for 1972 is the growth rate of the relevant variable over the 1971-
1973 period). The estimated correlation coefficient is 0.81.


Energy use (thousand tons (kt) of oil equivalent) refers to use of primary energy before transformation
to other end-use fuels, which is equal to indigenous production plus imports and stock changes, minus
exports and fuels supplied to ships and aircraft engaged in international transport (World Bank, World
Development Indicators database).




34


COMMODITIES AND DEVELOPMENT REPORT


Historically, in the process of industrialization, the re-
source intensity of growth in Europe, Japan, the Re-
public of Korea and the United States has been high.
Therefore, it is likely that China and India will contin-
ue along a similar commodity-intensive growth path,
as both their per capita GDP and intensity of resource
use have some way to go before reaching the historic
levels of the United States and Europe. Their demand
for steel, coal, aluminium, copper and other minerals
and ores is likely to rise for some decades to come
(Kaplinsky and Farooki, 2010).10 Moreover, there is
some evidence of a strong correlation between world
growth in manufacturing value added and in energy
use during the period 1970 to 2011 (Figure 2.5), which
can be considered a proxy for world demand for hard
commodities.11 In this respect, a parallel can argu-
ably be established between the demand conditions
for energy in the mid-1970s and the corresponding
conditions in the mid-2000s.


2.2. united States exchange
rates and global monetary
conditions


2.2.1. Parallels in United States exchange
rates and monetary conditions


The 1970s and 2000s were characterized by a real
depreciation of the United States dollar and low
real interest rates globally. There are a number of
mechanisms through which real interest rates and
exchange rates affect commodity prices, which are
explained below. First, however, it is useful to de-
scribe the main parallels between global monetary
conditions in the 1970s and the 2000s.


In the 1970s, the breakdown of the Bretton Woods
system of gold-based fixed exchange rates permit-
ted substantial monetary expansion in the United
States, which was associated with a real deprecia-
tion of the dollar, by 50 per cent between 1971 and
1980, as well as to a lowering of global real interest
rates (McKinnon, 1982; Barsky and Killian, 2002).
Between 2001 and 2010, although the dollar again
depreciated, by 26  per cent, the United States re-
corded a growing trade deficit which has been fi-
nanced by sizeable capital inflows from emerging
economies. These inflows have provided a source
of cheap capital and have helped to maintain low
interest rates that were first introduced following the
2001 economic slowdown.12


In response to the expansionary monetary policies of
the United States, central banks in emerging market
economies, such as Brazil, intervened in 2010 and
2011 to prevent their currencies from appreciating
too much against the dollar, although with only mod-
est success, as other factors were also playing a
role. In both periods –1970s and 2000s – the United


States effectively exported monetary expansion and
inflation to other countries that attempted to prevent
strong appreciation of their currency against the dol-
lar, thereby lowering world real interest rates in the
process (McKinnon, 2011).


2.2.2. The effects of real interest rates on
commodity prices


Low real interest rates can push up commodity pric-
es by lowering borrowing costs and thereby cata-
lyzing investment and stimulating demand.13 The
low real interest rates in the United States and thus
its monetary policy over the last decade not only
increased liquidity in the United States but also in
commodity markets worldwide. As commodities are
traded in dollars, this increased liquidity generated
upward pressure on commodity prices.


There are three other channels through which a low
real interest rate increases commodity prices: (i) it
reduces the incentive for extraction today rather
than tomorrow, thereby reducing supply; (ii) it low-
ers the cost of holding inventories, thus stimulating
demand; and (iii) it shifts financial investment away
from United States Treasury bills into commodity-
related portfolio investments and commodity index
funds, causing an overshooting of commodity pric-
es14 (discussed in section 3.5.1; see also Frankel,
2008). However, each of these three explanations
has inherent caveats, which are explored below.


2.2.3. Interest rates and the intertemporal
trade-off in commodity production


If interest rates and commodity extraction are di-
rectly related, it is argued that, all other things being
equal, as interest rates rise mine owners could dis-
count future profits more heavily relative to current
profits. The net prevailing value of current revenues
will therefore increase as the interest rate rises,
leading to greater extraction in the current period.
This is termed the Hotelling model. Conversely, lower
interest rates should lead to reduced supply in the
current period. Thus the effect of lower interest rates
should be an increase in prices in the current period
as supplies contract.15 This can only be applied to
commodities which are scarce and non-renewable,
such as metals, whose extraction necessarily dimin-
ishes the remaining amounts available. For agricul-
tural commodities, no such intertemporal trade-off
in production exists. However, the Hotelling model
is too simplistic to be generalized, since it fails to
distinguish between the economic agents involved.
There are conflicting interests and motivations be-
tween the private mining companies operating the
mines, the private (or State) landlords seeking to
earn land rents, and government royalties (i.e. pro-
duction taxes – effectively a share of profits/rents).


The 1970s and
2000s were


characterized
by dollar


depreciation and
low real interest


rates globally.


It is likely
that China


and India will
continue along
a commodity-


intensive growth
path, as both of
their per capita


GDP and intensity
of resource use
have some way


to go before
reaching the


levels of the US
and Europe.




35


cHapter II: commodity boom and bust in histoRical peRspective: new twists


Low real interest
rates can raise
commodity prices
by lowering
borrowing costs
and thereby
catalyzing
investment
and stimulating
demand.


For example, mining companies can invest their ac-
cumulated capital in the development of new mines
or the acquisition of other mining companies, rather
than in United States Treasury bonds to earn interest.
In contrast to the Hotelling model, low real interest
rates reduce the cost of borrowing capital, which is
particularly important in mining development owing
to its capital intensity and long gestation periods be-
fore profits can be realized. Thus, low interest rates
in fact encourage increased borrowing and invest-
ment in mining development, raising overall supply
in the medium term. Indeed, except for the period
mid-2008 to 2009, there has been increasing invest-
ment in mine development by mining companies in
recent years (PWC, 2011).


Where mining operations are State-owned, or where
the State levies production taxes, there are many
other factors influencing extraction levels beyond in-
terest rate concerns. For example, in the case of na-
tional gas or oil companies, which currently control
approximately 90 per cent of the world’s oil reserves
and 75 per cent of global production, the World Bank
(2011) outlines many factors which determine ex-
traction decisions beyond interest rate concerns.
These factors include international agreements on
supply (particularly OPEC quotas), public spend-
ing pressures, intergenerational concerns, suitable
reinvestment opportunities, Dutch disease-related
issues, short-term versus long-term price expec-
tations, as well as extraction cost expectations. As
Stiglitz (2007) explains, high current costs of extrac-
tion may provide incentives for governments to wait
and extract at a later date if there is expectation of


technical progress in extraction techniques. This
also applies to large private producers.


2.2.4. Interest rates and commodity
inventory holding


In the context of strong physical demand and rising
commodity prices, low real interest rates will lower
the cost of carry,16 and so encourage inventory hoard-
ing in the expectation of capital gains on inventories at
a future date. However, when prices of commodities
are declining, low real interest rates and the conveni-
ence yield associated with holding inventories must
be weighed against possible depreciation of inventory
holdings over time as commodity prices fall.


Although there appears to be a negative relationship
between commodity price indices and real inter-
est rates, the relationship is not statistically stable
over time (Frankel, 2008, and figure 2.6). During the
1970s, spikes in commodity prices corresponded
with periods of low real interest rates. This also oc-
curred in mid-2008, and once again since 2009 the
recovery in commodity prices has coincided with a
period of low interest rates (see discussion on finan-
cialization in section 3.1.1). As a result of the lack
of stability between commodity price indices and
real interest rates, more recently in the context of
rising commodity prices, as real interest rates fell
from 2.8  per cent in July 2007 to -3  per cent by
June 2008, the commodity rate of interest18 fell by a
greater amount for many commodities as the spike
in commodity prices in mid-2008 may have provided
incentives to hoard inventories (Figure 2.6).


Figure 2.6. Evolution of real interest rates in the United States and real price index of
commodities, 1960–2011


-8


-6


-4


-2


0


2


4


6


8


10


12


0


50


100


150


200


250


300


350


400


19
60


19
63


19
66


19
69


19
72


19
75


19
78


19
81


19
84


19
87


19
90


19
93


19
96


19
99


20
02


20
05


20
08


20
11


Co
m


m
od


ity
p


ric
e


in
de


x
(2


00
5=


10
0)


Real price index of commodities United States real interest rates, right axis


Un
ite


d
St


at
es


re
al


in
te


re
st


ra
te


(%
)


Source: Thomson Reuters, Datastream.
Note: Real interest rates are calculated as the United States’ effective federal funds rate less consumer price


index (CPI) inflation rate. The commodity price index is derived from the Commodity Research Bureau
Commodity Index, deflated by United States core CPI.




36


COMMODITIES AND DEVELOPMENT REPORT


However, there is limited evidence that any hoard-
ing actually took place during the recent commodity
boom, although in the case of extractive commodi-
ties such as crude oil, rates of extraction may have
been reduced because low interest rates would yield
low returns on revenues generated (Davidson, 2008;
Baffes and Haniotis, 2010). Thomas, Muhleisen and
Pant (2010) note that OPEC production averaged
about 97  per cent of capacity between 2005 and
late 2008, and OPEC only cut supplies in 2009 in
response to the collapse in prices in late 2008. In
the absence of physical evidence of hoarding, the
conclusion is not that incentives to hoard do not ex-
ist in the context of rising commodity price expecta-
tions and low interest rates; rather, that there are
incentives to hoard on both the supply and demand
sides of the market on expectations of higher prices
in the future. A simultaneous reduction in supply and
increase in demand at any given spot price19 results
in spot prices rising to a new equilibrium without the
requirement of any change in the quantities traded
or evidence of accumulating physical inventories on
either the supply or demand side of the market.20


2.3. Effect of changes in
real exchange rates on
commodity prices


The real depreciation of the dollar makes commodi-
ties (which are generally priced in dollars) cheaper
to non-United States buyers, increasing their pur-
chasing power and demand for commodities, and
therefore associated with a rise in dollar-denominat-
ed prices of commodities (IMF, 2008). In the case


of non-United States producers, dollar depreciation
effectively lowers revenues expressed in domestic
currency, which places pressure on prices to rise
in order to maintain margins. Abbot, Hurt and Tyner
(2008) discuss the effects of dollar depreciation
on the prices of agricultural commodities (such as
maize, wheat and soybeans), a large proportion of
which are exported by the United States. They note
that its depreciation leads to a gain in United States
export shares, but at the same time increases the
dollar-denominated prices of those commodities as
foreign demand rises and domestic supply falls.


A falling dollar also reduces the relative returns on
dollar-denominated financial assets, which can make
commodities a more attractive asset class for invest-
ments that are invested in futures contracts (IMF,
2008), feeding through to higher spot prices. An ad-
ditional channel is where dollar depreciation leads to
monetary expansion in countries whose currencies
are pegged to the dollar. Without effective sterilization
of foreign exchange interventions, this leads to lower
real interest rates and increased liquidity, thereby
stimulating demand for commodities.


The effect of dollar depreciation on commodity pric-
es is more pronounced when commodity inventories
are low. In those conditions, increased demand fol-
lowing dollar depreciation by non-United States buy-
ers will only be met by close to perfectly inelastic
supply, since, in contrast to manufactures, supplies
of commodities cannot readily be increased in the
short run in response to demand. This leads to an
instant increase in dollar prices with little, if any,
change in the quantity supplied. Conversely, when


The effect
of dollar


depreciation
on commodity
prices is more


pronounced
when commodity


inventories are
low.


Figure 2.7. United States real exchange rate and real commodity prices, 1960–2011


0


50


100


150


200


250


300


350


400


0


20


40


60


80


100


120


140


19
60


Q1


19
63


Q1


19
66


Q1


19
69


Q1


19
72


Q1


19
75


Q1


19
78


Q1


19
81


Q1


19
84


Q1


19
87


Q1


19
90


Q1


19
93


Q1


19
96


Q1


19
99


Q1


20
02


Q1


20
05


Q1


20
08


Q1


20
11


Q1


Un
ite


d
St


at
es


re
al


e
xc


ha
ng


e
ra


te


(2
00


5=
10


0)


United States real exchange rate (relative to a weighted currency basket)
Real commodity price index


Re
al


c
om


m
od


ity
p


ric
e


in
de


x


Source: UNCTAD secretariat calculations, based on IMF, International Financial Statistics.
Note: The real dollar exchange rate is calculated relative to a basket of currencies comprising the euro, the


Canadian dollar, the pound sterling and the Japanese yen with weights 2:1:1:1. Percentage changes in
the deutsch mark exchange rate are used to estimate the dollar/euro exchange rate prior to 1999. To
derive real exchange rates, all nominal exchange rates are multiplied by the ratio of the country’s GDP
deflator relative to the United States GDP deflator.




37


cHapter II: commodity boom and bust in histoRical peRspective: new twists


Figure 2.8. Price of crude oil compared with (a) share of crude oil and petroleum in total
goods imports of the United States, and (b) the United States trade deficit as a
percentage of GDP, 2001–2010.


0


5


10


15


20


25


0


10


20


30


40


50


60


70


80


90


100


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


$


Oil as a percentage of total US goods imports
WTI crude oil price/ barrel ($), right axis


Per cent


A.


0


1


2


3


4


5


6


7


0


10


20


30


40


50


60


70


80


90


100


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


$


US goods trade deficit as a percentage of GDP
WTI crude oil price/ barrel ($), right axis


Per cent


B.


Sources: ITC (2011) for data on crude oil and petroleum imports; Thomson Reuters, Datastream for data
on WTI crude oil annual mean price/barrel; ITC (2011) for data on United States trade deficit;
and United States Bureau of Economic Analysis (2011) for GDP in current dollars.


inventories are high, dollar depreciation and subse-
quent increases in demand from non-United States
buyers can be readily met through supplies drawn
from commodity inventories. It is for this reason that
real exchange rate effects on prices are conditional
on low inventories. Indeed, it follows that the re-
lationship between commodity prices and the real
dollar exchange rate against a basket of currencies
should not be expected to be constant over time, but
dependent on available supplies relative to demand.
Since 1960, it is only during periods where supplies
have been limited and stocks low (i.e. in the 1970s
and during the past decade), that there has been a
significant positive correlation between the dollar
exchange rate and commodity prices (Figure 2.7).


Crude oil and petroleum are particularly important
to the United States trade balance since they con-
stitute the largest proportion of imported goods (by
SITC code) into the United States (ITC, 2011). Hence,
a rise in the oil price adversely affects the United
States trade balance and hence the United States
current account, which can then lead to a depre-
ciation of the dollar relative to other currencies. Im-
portantly, during the period 2001–2008, the oil price
increased from an annual average of $22 per barrel
to $90 per barrel.21 As a result, oil and petroleum as
a percentage of total goods imports (by value) into
the United States increased from 9 per cent in 2001


to 21 per cent in 2008 (Figure 2.8). As expected, the
increase in the oil price during this period contrib-
uted to a deteriorating United States trade balance:
the United States goods trade deficit increased from
4.4 per cent of GDP in 2001 to 6 per cent in 200822
(Figure 2.8).


The composition of EU imports differs from that of
the United States in that crude oil and petroleum
constitute a significantly smaller proportion of the
area’s total goods imports, at 6 per cent in 2001 and
rising to 11 per cent in 2008 as oil prices increased
(Figure 2.9). This is a major reason why, in contrast
to the United States, the euro area’s external trade
deficit as a percentage of GDP has remained near
zero  per cent since 2001, despite increases in oil
prices (Figure 2.9).23 At the same time, oil-exporting
countries tend to raise their oil prices (in dollars) to
maintain their incomes from oil revenues against a
basket of currencies (UNCTAD, 2009).


Thus, any increases in oil prices will lead to a de-
preciation of the dollar relative to the euro, given
that the United States trade deficit grows far more
significantly than that of the euro zone. Further-
more, as the dollar depreciates against the euro, the
purchasing power and demand for oil (at any given
dollar price) in the euro zone increases, leading to
even higher dollar-denominated oil prices. A further


During the period
2001-2008, the
oil price increased
from an annual
average of
$24 par barrel to
$97 per barrel.




38


COMMODITIES AND DEVELOPMENT REPORT


increase in oil prices contributes to a further deterio-
ration of the United States trade balance relative to
that of the euro area, which is associated with a still
greater depreciation of the dollar, and higher oil pric-
es. It is this phenomenon which explains the strong
correlation between nominal oil prices and the ap-
preciation of the euro-dollar exchange rate since
2001 (Figure 2.10). Thus the persistent depreciation
of the dollar relative to the euro between 2001 and
2008 created incentives for diversification of dollar


foreign exchange reserves to euros by the OPEC and
other countries with persistent trade surpluses, and
to their accumulation of increasingly large foreign
exchange reserves.


What are the potential implications of dollar depre-
ciation for commodities? The IMF estimates that
a 1  per cent real depreciation of the dollar would
result in a greater than 1 per cent increase in the
real prices of gold, crude oil, aluminium and copper


Figure 2.9. (a) Share of crude oil and petroleum in EU goods imports vs. crude oil price;
(b) Euro area goods trade deficit as a percentage of GDP vs. crude oil price, 2001–2010


0


5


10


15


20


25


0


10


20


30


40


50


60


70


80


90


100


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


$


Oil as a percentage of total EU(15) imports
WTI crude oil price/ barrel ($), right axis


Per cent


A.


-1


0


1


2


3


4


5


6


7


0


10


20


30


40


50


60


70


80


90


100


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


$


Euro area (17) goods trade deficit as a percentage of GDP
WTI crude oil price/ barrel ($), right axis


Per cent


B.


Sources: ITC (2012) for data on imports of crude oil and petroleum; Thomson Reuters, Datastream for data on
annual mean price/barrel of WTI crude oil; European Central Bank, Eurostat (2011) for goods trade
deficit as a percentage of GDP in euro area.


Figure 2.10. Evolution of the nominal euro-dollar exchange rate and crude oil price, 2001–2010


0


0.2


0.4


0.6


0.8


1.0


1.2


1.4


1.6


1.8


0


20


40


60


80


100


120


140


160


01
-2


00
1


07
-2


00
1


01
-2


00
2


07
-2


00
2


01
-2


00
3


07
-2


00
3


01
-2


00
4


07
-2


00
4


01
-2


00
5


07
-2


00
5


01
-2


00
6


07
-2


00
6


01
-2


00
7


07
-2


00
7


01
-2


00
8


07
-2


00
8


01
-2


00
9


07
-2


00
9


01
-2


01
0


07
-2


01
0


No
m


in
al


e
ur


o-
do


lla
r e


xc
ha


ng
e


ra
te


W
TI


c
ru


de
o


il
pr


ic
e


($
)


WTI crude oil price ($) Nominal euro-dollar exchange rate


Source: Thomson Reuters, Datastream.


The IMF
estimates that a


1 per cent real
depreciation of


the dollar would
result in a greater


than 1 per cent
increase in the


real prices of
gold, crude oil,
aluminium and


copper in the
long run.




39


cHapter II: commodity boom and bust in histoRical peRspective: new twists


in the long run, after controlling for world industrial
production, interest rates and inventory levels.24 For
cereals, however, dollar depreciation does not ap-
pear to be an important determinant (IMF, 2008).
This is consistent with Gilbert (2010a) who also
finds no statistically significant effect of dollar de-
preciation on food prices.25 In contrast to crude oil,
the United States is a major exporter of cereals and
soybeans, which in 2010 collectively accounted for
17.9 per cent of United States net exports.26 Thus an
increase in cereal and soybean prices improves the
United States trade balance and reduces deprecia-
tion of the dollar in the medium term. This effectively
counteracts any inverse relationship between dollar
exchange rates and dollar-denominated cereal and
soybean prices.


2.3.1. United States exchange rate and
monetary policy: implications for
commodity prices


Since 2009, the strong rebound in prices of com-
modities and United States equities has partly
been driven by a modest economic recovery. But
it has also been driven by low interest rates and
quantitative easing in the United States, which has
resulted in greater financial investments in equi-
ties and commodities futures by primary dealers
while real capital investment has lagged behind.
This has led to concerns about overshooting in
equity and commodity prices beyond what would
be justified by economic fundamentals (Roubini,
2009).


Since 2008 the Federal Reserve has not been ex-
pected to raise interest rates relative to other coun-
tries, and so the dollar has remained the major fund-
ing currency in carry trades.27 This is because not
only could investors borrow dollars at near 0  per
cent nominal interest rates, but also, given the ex-
pectation that the dollar would further depreciate,
the value of dollar loans would effectively decline
relative to that of other currencies and world finan-
cial asset prices, yielding a negative real interest
rate of 10–20 per cent (Roubini, 2009).


Moreover, the United States faces inflationary pres-
sure due to: (i) growing speculation in commodity
markets; (ii) Chinese growth until 2011; and (iii) rap-
id expansion of liquidity and low real interest rates.
If this results in a tightening of monetary policy in
the United States, the current “boom” may became
a “bust” similar to that of the 1970s (Akyuz, 2011).
There have been recent signs of economic slow-
down in China, which, if prolonged, could substan-
tially reduce its demand for commodities, resulting
in a major downswing in commodity prices.28 For
those CDDCs (mainly in sub-Saharan Africa and
Latin America) that have benefited the most from


rising commodity prices and the expansion of global
liquidity (some of which have run up significant cur-
rent-account deficits) this could have significantly
deleterious impacts on growth and poverty reduc-
tion efforts. Some CDDCs have generated current-
account surpluses, as rising commodity prices have
generated higher export revenues. Beyond the ex-
change rate and the monetary policy of the United
States, other factors appear to have become more
important in commodity price formation in the last
decade or so. Some of these factors are discussed
in the next section.


3. NEw “TwISTS” TO ThE
PERENNIAL COMMODITy
PRObLEM


3.1. Changing long-term
demand patterns for
commodities


There are several new elements or “twists” to the
perennial commodity problem, such as:


• Growth in developing-country markets, espe-
cially in the BRICS, for minerals, metals and en-
ergy commodities;


• Growth in developing-country markets for high-
value agricultural commodities through new and
dynamic wholesale and retail outlets such as su-
permarkets. This growth is being driven mainly
by urbanization and the increasing purchasing
power of consumers in many developing coun-
tries, as well as changing food preferences/food
consumption patterns;


• Growth of biofuels, which has increased compe-
tition for cropland resources;


• The increasing role of TNCs in international trade
in commodities;


• Financialization of commodity markets;


• Sanitary and phytosanitary (SPS) standards and
technical barriers to trade (TBT); and


• Climate change, environmental pressures as
well as major public health challenges which
may have implications for productivity (e.g. avi-
an flu, HIV/AIDS, malaria).


Some of these global trends and new twists are dis-
cussed in chapters 3 and 4 of this report. This sec-
tion discusses four major new elements or “twists”
to the perennial commodity problem: financialization
of commodity markets, the growing importance of
biofuels, Chinese demand for commodities and the
growing role of TNCs in international commodity
trade. These four factors have a strong impact on
long-term demand patterns for commodities. These
factors are discussed below.


There have been
recent signs
of economic
slow down in
China, which, if
prolonged, could
substantially
reduce its
demand for
commodities,
resulting in a
major downswing
in commodity
prices.




40


COMMODITIES AND DEVELOPMENT REPORT


3.1.1. Financialization of commodity
markets


The sustained but volatile increases in commod-
ity prices since 2003 have been accompanied by a
growing presence of financial investors in commod-
ity derivative markets and by low real interest rates
on United States Treasury bills. This section first
examines a number of mechanisms through which
United States real interest rates and exchanges
rates have affected commodity prices (see also sec-
tion 2.3). This is followed by an assessment of the
degree to which large-scale speculative activities in
commodity-linked financial derivative markets have
affected commodity prices.


A. fINANCIAL INVESTMENT
IN TREASuRy bILLS
VERSuS COMMODITIES


Frankel’s (2008) contention that low real interest rates
encourage investors to reallocate funds out of Treasury
bill holdings into commodity markets implicitly as-
sumes that investors physically hoard commodities in
spot markets. However, With the exception of precious
metals, financial investment in commodities does not
take the form of physical handling. Rather, it has taken
the form of speculation on commodity price move-
ments via commodity index funds, which are rolling
commodity futures contracts traded at futures and op-
tions exchanges29 (Masters and White, 2008). If done
in the United States, there is not necessarily a trade-off
between returns on Treasury bills and returns on com-
modities, as the collateral or “margin” requirements
against futures positions can take the form of Treas-
ury bills, according to regulations of the Commod-
ity Futures Trading Commission (CFTC).30 Therefore
a speculator can earn interest on Treasury bills while
simultaneously speculating on commodity prices.


An alternative contention about the effects of low
real interest rates on commodity prices is that they
create “excess liquidity”, that is the excessive in-
vestment of new money into commodity index funds
(Baffes and Haniotis, 2010). According to Calvo
(2008), during the period 2007-2008 the excess li-
quidity largely arose as a result of sovereign wealth
funds rebalancing their portfolios – withdrawing
from low-yield United States Treasury bills and
buying higher yielding equities (corporate stocks) –
which had the effect of raising the yields on United
States Treasury bills and the United States effective
federal funds rate31 in the process. Therefore, some
argued that the United States Federal Reserve was
forced to intervene with expansionary open market
operations (i.e. buying Treasury bills and other secu-
rities with new money) in order to maintain the target
interest rate. The end result was an increase in the
money supply and higher commodity prices.


Notably, the Federal Reserve has continually reduced
the federal funds target interest rate, from 4.75 per
cent in September 2007 to 0–0.25 per cent by De-
cember 2008 – at the onset of the 2008-2009 reces-
sion. It followed this with two rounds of quantitative
easing programmes (further purchases of govern-
ment bonds and mortgage-backed securities with
new money) totalling $2.3  trillion between Novem-
ber 2008 and June 2011 (Federal Reserve, 2011).
Calvo (2008) maintains that commodity speculation
in futures markets is not to blame for commodity
price spikes; rather, he believes it is monetary ex-
pansion, and thus excess liquidity, which inflates
commodity prices. Thus commodity price increases
merely precede general inflation, because commodi-
ties are characterized by flexible prices (they adjust
immediately), whereas the prices and wages for
manufactured goods adjust more gradually (with a
time lag).32


However, before concluding that speculation in fu-
tures markets has no effect on commodity prices,
it is important to analyse the agents through which
expansionary open market operations by the Fed-
eral Reserve take place. This will provide a deeper
understanding of the process by which expansion-
ary monetary policies can raise commodity prices.
The Federal Reserve undertakes open market op-
erations through designated primary dealers which
consist of major investment banks/broker dealers,
such as Goldman Sachs, JP Morgan, Citigroup,
HSBC and Barclays Capital (Federal Reserve, 2011).
The new money created is transferred to primary
dealers in exchange for Treasury bills and other se-
curities, thereby reducing government bond yields
and the federal funds interest rate in the process.
For primary dealer investment banks, lending the
newly created money to financial investors involved
in equity and commodity index fund investments
via margin accounts33 is more secure than lending
directly to non-financial firms or consumers for the
purposes of purchasing physical commodities or
real investments. This is because financial inves-
tors’ margin accounts and associated liquid finan-
cial assets can at all times be directly monitored or
managed by the primary dealer; a client’s positions
can be readily liquidated by the primary dealer
whenever the client’s funds fall below the bor-
rowed amount, thus ensuring that the lender does
not incur material loan losses. In contrast, direct
lending to commercial firms for illiquid real capital
investments or for purchasing physical commodi-
ties cannot be so readily liquidated and pose a risk
of substantial loss to the lender. This effectively
creates asymmetry in the lending risk of primary
dealers, and favours lending at lower interest rates
to clients investing in liquid financial assets such as
equities and commodity futures contracts, as op-
posed to real capital investment.


An alternative
contention about
the effects of low
real interest rates


on commodity
prices is that


they create
“excess liquidity”
– often investing


new money in
commodity index


funds.




41


cHapter II: commodity boom and bust in histoRical peRspective: new twists


Such asymmetry in lending risk is particularly im-
portant since the collapse of the real estate bubble
in 2008, which skewed lending in favour of financial
investors. As a result, expansionary monetary poli-
cies and financial investment which lead to a rise in
equity and commodity futures prices can readily
overshoot real investment in the economy.


By reducing the returns on Treasury bills, the Federal
Reserve is providing incentives to financial inves-
tors to rebalance their portfolios towards potentially
higher yielding assets, such as equities, commodity
index funds34 and commodity futures contracts with
the quantitative easing, further inflating financial
equity35 and commodity futures prices.36 It might be
noted that most index funds and exchange-traded
funds are in equities. But while commodity index
funds are small in relation to those for equities, they
are very large in relation to the size of even the oil
market, let alone other commodities.


There is a major difference between equity invest-
ment and commodity index fund investment in that
in contrast to buying equities, Treasury bills can be
placed as collateral against commodity futures posi-
tions,37 therefore returns on commodity index funds
are higher than those on Treasury bills. Nevertheless,
as Treasury bill returns fall as a result of expansion-
ary monetary policies, the difference between ex-
cess returns on commodity index funds and those on
Treasury bills rises, providing increased incentives
to place Treasury bills as collateral (margin) against
more risky, higher yielding positions in commodity
futures markets. Importantly, non-commercial finan-
cial investment in commodity futures markets has
been concentrated on the buy (long) side of the com-


modity futures market, with a significant proportion
taking the form of passive investment in large com-
modity index funds such as the Dow Jones UBS and
S&P Goldman Sachs Commodity Index – indexes
that involve taking long positions in a range of com-
modities in preset weights. There was a substantial
influx of long side investment in commodity futures
since the start of the commodity price boom, which
was exacerbated by monetary expansion. This gave
rise to commodity futures price bubbles through
“weight of money” effects, as increasing inflows of
long (buy) positions in themselves raise commodity
futures prices. This is because for each futures price
there is a given supply of ask (sell) orders, which is
not infinite, therefore relatively large bid (buy) orders
will raise futures prices. Higher futures prices affect
commodity spot markets by altering price expecta-
tions and market sentiments (Nissanke, 2012).


In January 2011, Federal Reserve Chairman, Ben
Bernanke, noted that United States quantitative
easing programmes had contributed to a stronger
stock market since the collapse of equities in 2008-
2009.38 However, the monetary expansions have
not led to any significant improvement in United
States employment, which remained above 9  per
cent for much of 2011 and declined only in January
2012 to 8.3 per cent. The underlying reason for this
is that, although United States equity prices and
corporate balance sheets have grown substantially
following the quantitative easing programmes be-
ginning in late 2008, capital, in aggregate, rather
than being invested in expanding employment or in
new machinery and equipment, has largely taken
the form of corporate cash and liquid asset hoard-
ing (see Figure 2.11).39


While commodity
index funds
(CIFs) are small
in relation to
investments in
equities, they
are very large
in relation to
the size of the
oil and other
commodities
markets.


Figure 2.11. Aggregate balance sheet of United States non-farm, non-financial corporate
business, 2006–2010 (annual growth rate)


-5


0


5


10


15


20


2006 2007 2008 2009 2010


Equipment, machinery and software Cash and liquid assets


Pe
r c


en
t


Source: Federal Reserve (2012).
Note: Liquid assets include shares in low-risk short-term money market funds and United States Treasury


securities.




42


COMMODITIES AND DEVELOPMENT REPORT


Therefore, rising equity prices are not necessarily a
reflection of real economic investment and growth
or of real demand for commodities; rather, they may
reflect a potentially unsustainable asset price bub-
ble fuelled by monetary expansion. This analysis is
consistent with UNCTAD (2011), which notes that
the synchronized increases in equity and commodity
prices since 2008 are not sustainable, given the low
capacity utilization in processing/manufactures in-
dustries, which are the underlying sources of physi-
cal demand for commodities.


In summary, United States expansionary monetary
policies appear to have fuelled asset price bubbles
in both equity and commodity futures markets, as
primary dealers have skewed lending towards finan-
cial asset investors as opposed to riskier real capital
investment and consumption. With financial inves-
tors rebalancing portfolios away from low-yielding
Treasury bills towards equities and commodity fu-
tures, this has contributed to inflating both these as-
set classes.


b. COMMODITy DERIVATIVE
MARkETS AND
COMMODITy PRICES


The growing “financialization” of commodity mar-
kets began in response to the dramatic decline in
equity prices following the bursting of the dotcom
bubble in 2000. Investment in commodities as an
asset class served as a means for investors to diver-
sify their portfolios and for leverage purposes. How-
ever, this growing presence of financial investors in
commodity markets has raised concerns that finan-
cial investors are creating increased volatility and
price movements unrelated to fundamentals (IMF,
2008; UNCTAD, 2011). The annual number of com-


modity futures contracts traded on world exchanges
has risen exponentially, from 418 million in 2001 to
2.6 billion in 2010 (Figure 2.12).


Global derivative markets are still dominated by for-
eign exchange derivatives trading, but the share of
commodities as a proportion of the world total has
increased significantly, from 3 per cent in 2003 to
9 per cent in 2010 (figure 2.22). The notional amount
of over-the-counter (OTC) derivatives traded has sig-
nificantly declined as a result of increased uncertain-
ty and risk aversion with respect to counterparty risk
since the collapse of Lehman Brothers in September
2008, and trading activities have gradually shifted
towards futures/options exchanges (Figure 2.13).40


There are three main types of participants in com-
modity futures markets. First, there are commer-
cial participants, which wish to either buy or sell the
underlying physical commodities in the future, and
seek to hedge the risk of future price movements
by entering into a futures or an options contract.41


Second, there are money managers, including hedge
funds and commodity trading pools, which seek
short- to medium-term gains through leveraged po-
sitions. Some of them trade on the basis of short-
term price trends, while others trade according to
underlying market fundamentals. These may be
described as noise traders. Third are index traders,
which take passive, almost entirely long positions in
commodity futures markets, and account for about
40 per cent of all long open interest trades42 (Masters
and White, 2008). Index traders, like noise traders,
may change their positions in commodities accord-
ing to wealth effects43 from others assets, such as
equities and bonds within their portfolios. An esti-
mated 95 per cent of commodity index traders ordi-
narily follow the Standard & Poor’s Goldman Sachs


The growing
presence of


financial investors
in commodities


has raised
concerns that


financial investors
are creating


increased price
volatility unrelated


to market
fundamentals.


Figure 2.12. Evolution of commodity trading contracts on world exchanges, 2000–2011 (millions)


-


5


10


15


20


25


30


35


40


45


0


500


1 000


1 500


2 000


2 500


3 000


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e


Nu
m


be
r o


f c
on


tr
ac


ts
o


ut
st


an
di


ng


An
nu


al
n


um
be


r o
f c


on
tr


ac
ts


tr
ad


ed


Annual number of contracts traded Number of contracts outstanding


Source: Bank for International Settlements, http://www.bis.org/statistics/extderiv.htm




43


cHapter II: commodity boom and bust in histoRical peRspective: new twists


Commodities Index (more heavily weighted towards
energy commodities) or the Dow Jones UBS Com-
modity Index (weighted more towards agricultural
commodities) (Baffes and Haniotis, 2010).44


Investments in these indexes involves taking long
positions on the nearby futures contracts, selling
(shorting) those contracts before they reach matu-
rity, then entering new long positions on the next
nearby futures contracts (called “rolling”). For index
traders, the returns on investment in each period
depend on three factors. First, whether the futures
price increases since the time of purchase (yielding
positive “spot” returns) or decreases (yielding nega-
tive “spot” returns). Second, is whether the futures
market is in contango or backwardation.45 Third is
the United States Treasury bill (T-bill) interest rate.


In contrast to the 1980s and 1990s, recent years
have been characterized by “contango” commodity
futures markets (UNCTAD, 2009), giving negative roll
returns and T-bill interest rates have also been rela-
tively low. These two factors combined have sub-
stantially offset spot returns associated with posi-
tive changes in commodity futures prices. Moreover,
given the dramatic fall in commodity prices in mid-
2008 to 2009, over a five-year period, annualized
returns on commodity indices have actually been
negative and have underperformed the S&P 500 To-
tal Returns Index (figure 2.24). These developments
suggest, contrary to popular belief, that investment
in commodity indices can yield returns which are
below market returns, despite the commodity price
boom.46


The share of
commodities
as a proportion
of the global
derivatives market
has increased
from 3 per cent
in 2003 to 9 per
cent in 2010.


Figure 2.13. Commodity trading as a share of global derivatives trading, 2003–2010 (Per cent)


Figure 2.14. OTC derivatives trading of commodities, 2000–2010 ($ billion)


0


2


4


6


8


10


12


14


2003 2004 2005 2006 2007 2008 2009 2010


Turnover (contracts)


Number of contracts outstanding


Pe
r c


en
t


0


1 000


2 000


3 000


4 000


5 000


6 000


7 000


8 000


9 000


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


Gold Other precious metals Other commodities


No
tio


na
l v


al
ue


o
ut


st
an


di
ng


($
b


ill
io


n)


Source: Bank for International Settlements, at: http://www.bis.org/statistics/extderiv.htm.


Source: Bank for International Settlements, http://www.bis.org/statistics/extderiv.htm.


Around
95 per cent
of commodity
index traders
follow the S & P
Goldman Sachs
Commodity Index
or the Dow Jones
UBS Commodity
Index.




44


COMMODITIES AND DEVELOPMENT REPORT


Indexed commodity funds were sold to investors
and pension funds as a means of diversifying their
portfolios. Since the 1970s, returns on commodity
indices have been negatively correlated with eq-
uity returns; as returns on commodity indices rise,
those on equities fall (Greer, 2000; Masters and
White, 2008). However, on analysis of the S&P 500
Total Returns Index and the Goldman Sachs Com-
modity Total Returns Index, it is clear that the indi-
ces are not negatively correlated over all periods
(Table 2.1).


In particular, between 1971 and 1980, a period of
boom in commodities, the S&P 500 Total Returns
Index and the Goldman Sachs Commodity Total Re-
turns Index had a negative correlation coefficient
of -58.4  per cent. By contrast, in the more recent
commodity price boom (2003–2011) the correlation
coefficient was significantly positive at +67.1  per


cent (see also Figure 2.16). To analyse the relation-
ship between commodity prices and equity returns,
the GSCI Commodity Spot Price Index and CRB com-
modity Spot Price Index relative to S&P 500 total
returns is used. Table 2.1 shows that the correla-
tion coefficient between commodity total returns and
equity total returns was also positive in the 1980s
and 1990s, at +72.5 per cent and 5.9 per cent re-
spectively. However, in the 1980s and 1990s, the
correlation between the S&P 500 Total Returns Index
and the Goldman Sachs Commodity Spot Price In-
dex47 was strongly negative (Table 2.1). Total returns
were positively correlated to S&P 500 total returns in
the 1980s and 1990s due to backwardation in com-
modity futures prices (yielding positive roll returns)
as well as relatively higher interest rates on T-bills.
These offset the negative commodity spot returns,
as prices of commodities largely declined during this
period.


Figure 2.15. Relative performance of commodities as an asset class (no. of years to 31 August 2011)


-20


-15


-10


-5


0


5


10


15


20


25


30


5 years 3 years 1 year


S&P 500 (Total Returns) S&P GSCI (S&P Goldman Sachs Commodity Index)


Pe
r c


en
t


Source: Standard & Poor’s Indices Performance Reports (2011).
Note: The figures show annualized percentage changes in returns. Thus, for the three years leading up to


31 August 2011, the GSCI annualized return was -15.9 per cent, which means there was an annual
decline of 15.9 per cent in the total returns since March 2008. The S&P 500 Total Returns Index is
a free-floating capitalization-weighted index of share prices and dividends of the top 500 large-cap
stocks actively traded in the United States.


Table 2.1. Correlation between log S&P 500 Real Total Returns Index and log Goldman Sachs
Commodity Real Total Returns Index and Real Spot Price Index


Correlation between log of S&P 500 Real Total
Returns Index and log of Goldman Sachs


Commodity Real Total Returns Index (per cent)


Correlation between log of S&P 500 Real Total
Returns Index and log of Goldman Sachs


Commodity Real Spot Price Index (per cent)


1971–1980 -58.4 -30.8


1981–1990 +72.5 -86.9


1991–2000 +5.9 -53.3


2001–2010 +62.2 +48.9


2003–2010 +67.1 +56.6


Source: UNCTAD secretariat calculations, based on data shown in Figure 2.16.
Note: The table comprises the following data: the S&P 500 total returns (change in equity prices + dividends)


and Goldman Sachs Commodity Index (GSCI) total returns as in figure 2.26.




45


cHapter II: commodity boom and bust in histoRical peRspective: new twists


Figure 2.16. Evolution of Goldman Sachs commodity indexes compared with S&P 500
Total Returns Index, 1970–2010


Figure 2.17. Chicago Board of Trade wheat and soybeans: non-commercial, non-index trader
net long positions compared with index trader net long positions, 2006–2011


0


50


100


150


200


250


300


350
19


70
19


71
19


72
19


73
19


74
19


75
19


76
19


77
19


78
19


79
19


80
19


81
19


82
19


83
19


84
19


85
19


86
19


87
19


88
19


89
19


90
19


91
19


92
19


93
19


94
19


95
19


96
19


97
19


98
19


99
20


00
20


01
20


02
20


03
20


04
20


05
20


06
20


07
20


08
20


09
20


10
20


11


Re
al


re
tu


rn
/ p


ric
e


in
de


x
(2


00
5=


10
0)


S&P Goldman Sachs Commodity Total Returns Index


S&P 500 Total Return Index


S&P Goldman Sachs Real Price Index


-100 000


-50 000


0


50 000


100 000


150 000


200 000


250 000


01
-2


00
6


04
-2


00
6


07
-2


00
6


10
-2


00
6


01
-2


00
7


04
-2


00
7


07
-2


00
7


10
-2


00
7


01
-2


00
8


04
-2


00
8


07
-2


00
8


10
-2


00
8


01
-2


00
9


04
-2


00
9


07
-2


00
9


10
-2


00
9


01
-2


01
0


04
-2


01
0


07
-2


01
0


10
-2


01
0


01
-2


01
1


04
-2


01
1


07
-2


01
1


10
-2


01
1


Wheat: non-commercial, non-index trader – net long
Wheat: index trader – net long
Soybeans: non-commercial, non-index trader – net long
Soybeans: index trader – net long


No
. o


f
ne


t l
on


g
po


si
tio


ns


Source: Thomson Reuters, Datastream (July, 2011): Goldman Sachs Commodity Total Returns Index,
Goldman Sachs Commodity Spot Price index, S&P 500 Total Returns Index, all deflated by
United States core CPI to derive real returns/prices; monthly data series.


Source: Thomson Reuters, Datastream (March, 2012)
Note: Based on weekly data.


The recent commodity price boom (2003–2011)
represents the first time that the Goldman Sachs
Commodity Spot Price Index has been positively
correlated with the S&P 500 Total Return Index
– a correlation of +56.6  per cent. This positive
correlation can be explained, in part, by the grow-
ing presence of long-only commodity index in-


vestment48 within investor portfolios and pension
funds since the collapse of the dotcom bubble.
However, it should also be noted that net index
trader positions were significantly larger than
net non-commercial, non-index trader (managed
funds)49 positions throughout the period 2006–
2011 (Figure 2.17).


During the 2003-
2011 commodity
price boom,
the GSCS price
index and the
S & P 500 total
return index have
been positively
correlated for the
first time.




46


COMMODITIES AND DEVELOPMENT REPORT


The expansion or contraction of investments in com-
modity indices mainly results from fluctuations in in-
come from investments in other asset classes, espe-
cially with respect to returns from the largest asset
class, namely equities.50 Thus, when total returns on
a major equity index such as the S&P 500 Total Re-
turn Index rises, this creates positive wealth effects,
and prompts portfolio investors and pension funds to
invest more in commodity index funds.


Growing investments in commodity index funds in
turn create spot returns as commodity futures pric-
es rise through the increasing purchase of com-
modity futures contracts by commodity index in-
vestors. Conversely, where investors’ total returns
from equities decline, a negative wealth effect
takes place, resulting in a fall in commodity index
fund investments and thus in commodity futures
prices. This source of correlation in the spot prices
of commodities and equity returns is detached from
the underlying fundamentals of commodity mar-
kets, resulting in distorted prices and increased
volatility (Tang and Xiong, 2010; Nissanke, 2010).
An increased correlation between equity returns
and commodity price indices may also be explained
by greater labour market flexibility in developed
countries since the 1970s, which decouples wages
from rising commodity prices (Blanchard and Riggi,
2009).


Since the 2009 recession, low interest rates and
quantitative easing programmes in the United States
have been another underlying source of correlation
between commodity prices and equity returns. The
primary dealers have been using the newly created
money extended to them to invest in equities and
commodity futures, while investment in labour and
capital has been relatively stagnant.51 This has led to
concerns about excess liquidity and overshooting in
equities and commodity prices beyond what might
occur in response to economic fundamentals (see
section 2.2.2).


The majority of index investors are institutional, such
as pension funds, which tend to keep a relatively
fixed proportion of commodity investments in their
portfolios. In the period 2003 to 2008 approximately
85  per cent of index speculators traded through
swap deals with investment banks (Masters and
White, 2008). In particular, 60 per cent of all posi-
tions attributed to index speculators were controlled
by four Wall Street swap dealer banks, namely Gold-
man Sachs, Morgan Stanley, JP Morgan and Bar-
clays Bank, giving them significant market power in
commodity derivatives markets (Masters and White,
2008). Index speculators average about 40 per cent
of total long open interest, therefore these four Wall
Street swaps dealers control almost a quarter of to-
tal long open interest in commodity futures indices,
excluding trading on their own account.


The large size of net long index funds, combined
with positions of swap dealers trading on their own
account, can effectively inflate commodity futures
prices and create bubbles through “weight of mon-
ey” effects (UNCTAD, 2009). In the case of indexed
commodity funds, this effect is particularly relevant,
because the commodity indices pool large amounts
of capital together which trade almost entirely on the
buy side of the market.


The United States CFTC requires swap dealers to
declare index trader positions hedged on exchanges
only every Tuesday, and only for agricultural com-
modities. These data are not published until the
following Friday (CME, 2011); therefore swap deal-
ing investment banks possess private information
on the inflow of large commodity index investment
unknown to other traders.52 More significantly, com-
modity index investments may be hedged by swap
dealers against commercial/speculative counterpar-
ties on OTC market. These do not need to be declared
to the CFTC. Thus, even once data is published by
the CFTC regarding on-exchange index trader/swap
dealer positions, there is no public information on
OTC activity and hence no information on aggregate
index trader/swap dealer positions. This means the
effect of index trader investment/swap dealer posi-
tions on commodity futures prices is impossible to
quantitatively estimate accurately. This informa-
tion asymmetry gives swap dealers a competitive
advantage when trading on their own account. Ef-
fectively, without public information on OTC activity,
and thus no information on the exact size and timing
of changes in index trader/swap dealer positions,
other traders (both physical commercial hedgers and
speculative futures traders) cannot judge whether
changes in the exchange futures price reflect new
fundamental information in the spot market or the
speculative weight of money effects.53


3.1.2. Biofuels and demand for
commodities


In recent years, several short-term and structural
factors have had an impact on cereal prices. At the
same time, there has also been a strong correlation
between crude oil prices and the prices of wheat,
maize and soybeans. This correlation may be ex-
plained by the growing use of maize and (to a lesser
extent) soybeans in the production of biofuels that are
used as substitutes for petroleum, diesel and gasoline
products. Estimates by the Food and Agriculture Or-
ganization of the United Nations (FAO), for example,
suggest that increased biofuel production contributed
to a roughly 97 per cent increase in the price of veg-
etable oils in the first three months of 2008 compared
with the same period in 2007 (FAO, 2008).54 It impos-
es a disproportionate cost on low-income households
in developing countries, which succumb to greater


60 per cent of
all positions


attributed to index
speculators were


controlled by
four Wall Street


swap dealer
banks, giving


them significant
market power
in commodity


derivatives
markets.




47


cHapter II: commodity boom and bust in histoRical peRspective: new twists


poverty and food insecurity owing to the high prices
of food. Biofuel production also has an impact even
on products that do not constitute feedstock, such
as wheat, because of the close relationship between
crops on both the demand side (because of substi-
tutability in consumption) and the supply side (due to
competition for land and other inputs).


Meanwhile, an increase in crude oil prices raises the
costs of fertilizers, chemicals and the transportation
of agricultural produce (USDA, 2009). Mitchell (2008)
estimates that higher fuel55 costs raise the export
prices of cereals by 15–20 per cent.


Since 2001, ethanol production has been growing
rapidly, from an average of 314,000 barrels/day in
2001 to 1,327,000 barrels/day in 2009 (Figure 2.18).
Brazil and the United States dominate, together ac-
counting for 88 per cent of world ethanol production
in 2009. In the United States, the main feedstock for
ethanol production is maize, whereas in Brazil it is


sugar cane. Some experts argue that ethanol from
sugar cane is probably the only environmentally sus-
tainable biofuel capable of being successfully devel-
oped in Brazil.56 Second-generation biofuels, such as
those derived from jatropha, which uses less water
and can be grown on marginal land with a minimal
impact on food security, could also be promoted.


Ethanol use as a proportion of world maize con-
sumption increased from 5 per cent in the 2003/04
crop year to an estimated 15 per cent in 2010/11
(Figure 2.19). This is effectively diverting food and
animal feedstock towards fuel production, with the
effect of raising food prices. The United States Gov-
ernment’s Renewable Fuel Standard (RFS) mandated
steady, annual increases in ethanol use through sub-
sidy programmes, which are to be met regardless of
market prices of oil, ethanol or maize, making de-
mand for maize less price-sensitive (Collins, 2008).
According to Collins, without government interven-
tion some ethanol plants would be unprofitable and


Since 2001,
ethanol
production rose
rapidly, the major
producers being
Brazil and the US.


Ethanol use as
a proportion
of world maize
consumption
increased
significantly
effectively
diverting food and
animal feedstock
towards fuel
production,
with the effect
of raising maize
prices.


Figure 2.19. Share of ethanol from maize in total world maize consumption, 2003/04–2010/11
(per cent)


Figure 2.18. World ethanol production, 2000–2009 (thousand barrels/day)


0


2


4


6


8


10


12


14


16


20
03


/0
4


20
04


/0
5


20
05


/0
6


20
07


/0
8


20
08


/0
9


20
09


/1
0


20
10


/1
1


Pe
r c


en
t


0


200


400


600


800


1 000


1 200


1 400


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


Brazil United States Others


Source: USDA (2011), World Agricultural Supply Demand Estimates (WASDE); available at: http://www.usda.
gov/oce/commodity/wasde/.


Source: Energy Information Agency (2011).




48


COMMODITIES AND DEVELOPMENT REPORT


would cease to operate, causing maize prices to
decline. Moreover, Wise (2012) shows that the Unit-
ed States ethanol policies have increased the food
bills of poor food-importing countries by $9.3 billion
since 2006. The steady increase in biofuel demand
supported by government subsidies means that the
volatility of maize prices cannot be solely explained
by fluctuations in basic demand.


Although ethanol production constitutes a new
source of demand for maize, it should be analysed
as part of annual total maize use in year-end in-
ventory ratios. Typically, the greater the total use of
maize relative to available inventories, the higher
will be the expected price. There has been a signifi-
cant upward shift in real prices of maize in 2007/08,
which is not reflected in changes in the ratio of total
use to ending stock (Figure 2.20). This suggests that
the large price spikes during this period cannot be
explained solely by fundamental changes in physi-
cal demand/supply conditions. Moreover, growth in
biofuel demand was anticipated and therefore would
not have contributed to the spike in prices due to
asymmetric information (Wright, 2009). The Inter-
national Food Policy Research Institute (IFPRI, 2009)
finds that index traders57 had a statistically signifi-
cant causal effect on maize futures prices during the
period January 2006 to May 2008, which may ex-
plain the upward shift in real spot prices. Thus it ap-
pears that speculative influences have more effect
in a context of low inventories and inelastic demand.


Despite concerns about soybeans being used as
feedstock in biodiesel, its production is relatively
marginal compared with ethanol production (Fig-
ure 2.21). The European Union (EU) produces ap-
proximately 60  per cent of the world’s biodiesel,
using rapeseed as the main feedstock rather than
soybeans (CRS, 2006). The main driver of soybean
demand appears to be China, but its demand is mostly


In general,
speculative


influences may
have more effect


in a context of
low inventories


and inelastic
demand.


The EU produces
60 per cent of the
world’s biodiesel,


using rapeseed
as the main
feedstock.


for animal feed and not for biofuels. Chinese imports of
soybeans as a share of world consumption rose from
11.2 per cent in 2002/03 to 22.3 per cent in 2010/11
(Figure 2.22). This is in contrast to wheat and maize, for
which Chinese imports since 2002/03 have been near
0 per cent of world consumption,58 given that China is
largely self-sufficient in these cereals (USDA, 2011). The
total use-to-inventory59 levels for soybeans are close to
their long-term average (Figure 2.23), implying that the
traditional market supply-demand forces do not explain
the doubling of prices since 2006/07. Mayer (2009)
and Gilbert (2010) both find statistical evidence that
index traders inflated soybean futures prices during
the period 2006–2009. Given low interest rates, this
could have fed through to hoarding in the spot market
in anticipation of higher prices, thus contracting sup-
ply and increasing demand simultaneously. This may
explain why, although there appears to be no change
in the use-to-inventory ratio, real prices increased dra-
matically from 2006 to 2008. As prices have remained
higher than pre-2006 levels for a sustained period, this
suggests that demand may have become more inelas-
tic to price changes.60


Wheat is not used as feedstock to produce biofuels;
the effect of biofuels on wheat production is there-
fore indirect, in that there is greater competition for
land-use for wheat production versus crops for bio-
fuel production, making supply more inelastic with
respect to price. In 2007/08, wheat stocks declined
to their lowest levels since 1990 (Figure 2.24). As
with soybeans and maize, the doubling of real prices
for wheat in 2007/08 seems excessive. However,
Mayer (2009) and Gilbert (2010a) find no empirical
evidence to suggest that index traders or other non-
commercial traders caused higher futures prices of
wheat. A plausible explanation for the higher pric-
es could be the huge fall in production due to the
drought in Australia, a large producer.


Figure 2.20. Maize: real price index and total use/ending stock ratio, 1990/91–2010/11


0
1
2
3
4
5
6
7
8
9


10


0


50


100


150


200


250


300


350


400


19
90


/9
1


19
91


/9
2


19
92


/9
3


19
93


/9
4


19
94


/9
5


19
95


/9
6


19
96


/9
7


19
97


/9
8


19
98


/9
9


19
99


/0
0


20
00


/0
1


20
01


/0
2


20
02


/0
3


20
03


/0
4


20
04


/0
5


20
05


/0
6


20
06


/0
7


20
07


/0
8


20
08


/0
9


20
09


/1
0


20
10


/1
1


Real price index Total use/ ending stock ratio, right axis


To
ta


l u
se


/ e
nd


in
g


st
oc


k
ra


tio


Re
al


p
ric


e
in


de
x


(2
00


4/
05


=1
00


)


Sources: USDA, Foreign Agricultural Service, Production, Supply and Distribution (PSD) online database,
for use/ending stocks; USDA Economic Research Service, for real dollar prices


Note: Nominal prices are adjusted by the United States Core CPI Index.




49


cHapter II: commodity boom and bust in histoRical peRspective: new twists


The soybean
use-to-stock
ratio is close to
its long-term
average, implying
that traditional
markets supply-
demand forces
do not explain the
doubling of prices
since 2006/07.


Figure 2.21. Biofuel production, 2001–2009 (thousand barrels/day)


Figure 2.22. Chinese imports as a share of total soybean use, 2002/03–2009/10 (Per cent)


Figure 2.23. Soybeans: Ratio of total use/ending stocks and real price index, 1990/91– 2010/11


0


200


400


600


800


1 000


1 200


1 400


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


Biodiesel Ethanol


0


5


10


15


20


25


20
02


/0
3


20
03


/0
4


20
04


/0
5


20
05


/0
6


20
06


/0
7


20
07


/0
8


20
08


/0
9


20
09


/1
0


Pe
r c


en
t


0


2


4


6


8


10


12


14


0


50


100


150


200


250


300


19
90


/9
1


19
91


/9
2


19
92


/9
3


19
93


/9
4


19
94


/9
5


19
95


/9
6


19
96


/9
7


19
97


/9
8


19
98


/9
9


19
99


/0
0


20
00


/0
1


20
01


/0
2


20
02


/0
3


20
03


/0
4


20
04


/0
5


20
05


/0
6


20
06


/0
7


20
07


/0
8


20
08


/0
9


20
09


/1
0


20
10


/1
1


Real price index (2004/05=100) Total use/ ending stock ratio, right axis


Re
al


p
ric


e
in


de
x


(2
00


4/
05


=
10


0)


To
ta


l u
se


/e
nd


in
g


st
oc


k
ra


tio


Source: Energy Information Agency (2011).


Source: USDA (2011), World Agricultural Supply Demand Estimates (WASDE); available at: http://www.usda.
gov/oce/commodity/wasde/.


Sources: USDA, Foreign Agricultural Service, Production, Supply and Distribution (PSD) online database, for
use/ending stocks; USDA, Economic Research Service, for real price index


Note: Nominal prices are adjusted by United States Core CPI Index.


The effect of
biofuels on wheat
production is
indirect, in that
there is greater
competition for
land-use for
wheat production
versus crop
for biofuel
production,
making supply
more inelastic
with respect to
price.




50


COMMODITIES AND DEVELOPMENT REPORT


The continuing debate about the impact of biofuel
production on food prices notwithstanding, major
economies have acknowledged the potential threat
and have taken steps in recent months to offset
this. In October 2012, the European commission
(EC) proposed to limit the use of crop-based bio-
fuels to meet the EU’s 10  per cent target for re-
newable transport energy by 2020. The new policy
proposed that only 50  per cent of that target be
met with biofuels from food crops. Moreover, the
EC will take into account the extra carbon emitted
when farmers switch from growing crops for food
to growing crops for fuel. The European commis-
sion’s new proposal also aims to promote invest-
ment in second-generation biofuels: such as those
produced from waste, algae or residue from other
processes. This is a welcome departure from the
previous mandate focussed on greater biofuel pro-
duction (irrespective of feedstocks), in favour of a
policy framework which at least recognises the po-
tential impacts of biofuel demand on food security.


In November 2012, the US Environmental Protection
Agency (EPA) rejected a request from the governors
of eight US states to waive requirements for blend-
ing maize-based ethanol into gasoline; a Renewable
Fuels Standard (RFS) mandate which contributed to
rising food costs during the worst drought in the US
for 50 years. Critics of the RFS argue that the EPA’s
decisions are often politically motivated, and that the
waiver process is insufficiently flexible to respond to
a crisis. A potential solution to these problems is out-
lined in the US Renewable Fuel Flexibility Act which
proposes that an automatic waiver of the RFS should
be triggered when stocks-to-use ratios are low, thus
making it more responsive to world supply and less
open to political influence (FAO et al., 2011; Wise,
2012).


Addressing the potentially negative impact of biofu-
els on land use (with growing competition from in-
dustrial and urban uses) and food security (especial-
ly in net-food importing developing countries) would
need to go beyond such biofuel mandate changes. It
requires the development of biofuel production sys-
tems which enhance smallholder farm production
and food systems. For example, some CDDCs could
consider promoting smallholder producer groups
and/ or co-operatives (improving economies of scale
and risk sharing) to intercrop biofuel feedstocks with
staple crops for regional food markets. Moreover,
CDDCs might also support smallholders in moving
up the value chain into both refining and selling
the biofuel feedstock. This would reflect a potential
win-win situation for CDDC smallholders, in terms of
both local energy uses and deterring an externally
driven reconfiguration of their agricultural markets,
structures and institutions. This may require a robust
case-by-case impact assessment that is sensitive to
food security. Many CDDCs irrespective of changes
in existing biofuel mandates, will remain net-food
importers, therefore, domestic food security consid-
erations should remain paramount in their allocation
of resources to biofuel production. An increase in
publicly funded research and subsidies into alterna-
tive sources of energy (e.g. wind and solar power) is
in the long-run probably the most viable means of
addressing this problem.


3.1.3. The China factor


A. ChINESE DEMAND fOR
COMMODITIES


The commodity price boom of the past decade has
increasingly focused attention on the role China
played in this boom.61 This is because, as dis-


Figure 2.24. Wheat: real price index and use/ending stock ratio, 1990/91–2010/11


0


1


2


3


4


5


6


7


8


0


50


100


150


200


250


19
90


/9
1


19
91


/9
2


19
92


/9
3


19
93


/9
4


19
94


/9
5


19
95


/9
6


19
96


/9
7


19
97


/9
8


19
98


/9
9


19
99


/0
0


20
00


/0
1


20
01


/0
2


20
02


/0
3


20
03


/0
4


20
04


/0
5


20
05


/0
6


20
06


/0
7


20
07


/0
8


20
08


/0
9


20
09


/1
0


20
10


/1
1


Real price index (2004/05=100) Total use/ending stock ratio, right axis


Re
al


p
ric


e
in


de
x


(2
00


4/
05


=1
00


)


To
ta


l u
se


/e
nd


in
g


st
oc


k
ra


tio


Sources: USDA Foreign Agricultural Service Production, Supply and Distribution (PSD) online database, for Use/
ending stocks (official USDA estimates); USDA, Economic Research Service, for real dollar prices


Note: Nominal prices are adjusted by United States Core CPI Index.


Addressing
the potentially


negative impact
of biofuels on
land use and
food security
requires the


development of
biofuel production


systems which
enhance


smallholder farm
production and
food systems.


CDDCs might
also support


smallholders in
moving up the


value chain into
both refining and
selling the biofuel


feedstock.




51


cHapter II: commodity boom and bust in histoRical peRspective: new twists


cussed earlier, the rise in commodity prices expe-
rienced since 2003 is very different from the ones
observed in the 1950s and 1970s. The latter were
driven by a combination of disruptions in supply
and expectations of demand growth; and whereas
the former was rapidly overcome, the latter re-
mained only expectations. As a result, the price
rises were short-lived. However, the current com-
modity price boom has lasted for quite a while,
which suggests that the supply constraints are
still prevalent, and that the demand for commodi-
ties is actually growing and may continue to do so
in the foreseeable future. However, there are at


least two schools of thought on the role of China
in this boom (Box: 2.1).


These two views notwithstanding, China’s share of
iron ore imports (used in the production of steel) is
especially significant, at 63 per cent in 2010 (Figure
2.25). However, its import shares of most other com-
modities, although significant, have been relatively
small. For example, in 2010, China’s import share
of crude and petroleum oil was just 7 per cent, and
that of cereals such as wheat and maize was also
very small due to its self-sufficiency in these com-
modities.


Box 2.1. The role of China in the boom in global commodity markets: Two schools of thought


Farooki and Kaplinsky (2011) argue that a large part of the increase in the demand for commodities is being
driven by the growth of the Chinese economy. In their opinion, China is influencing commodity markets because
it needs natural resources as drivers of growth – a mechanism they refer to as a combination of “growth” and
“consumption” effects. Specifically, they contend that China is pursuing a resource-intensive growth path that is
impacting on the soft, hard and energy commodity markets. China’s demand for commodities has been driven
by various factors since 2000. First, growing urbanization and infrastructure development have driven demand
for industrial metals (Kaplinski and Farooki, 2010). Second, China’s urban dietary habits are changing rapidly,
with a greater proportion of household income being spent on meat and fish products (Liu et al., 2009), which
in turn has stimulated import demand for soybeans as animal feedstock. Third, China’s main exports have
been electronics, metal-intensive consumer goods and textile products (ITC, 2011), which have stimulated
import demand for industrial metals, cotton and wool. Farooki and Kaplinsky conclude that China’s demand for
commodities has therefore played a major role in the recent commodity price booms.


A second school of thought represented by Roache (2012) takes a more cautious view concerning the impact
of China on commodity markets. He analyses its role in influencing the prices of oil and of some base metals (i.e.
aluminium, copper, lead, nickel, tin and zinc), and compares it with that of the United States. Specifically, Roache
focuses on two types of demand shocks that affect commodity prices. One is related to aggregate economic
activity – as activity increases, the demand for commodities as an input should also rise. The second relates to
commodity-specific demand shocks that are unrelated to aggregate activity, such as changes in the desired
stock-holding of the State agencies that manage China’s inventories, or temporary demand substitution. In the
econometric specification, the first shock is measured by industrial production, while the second is measured
by apparent consumption.a


With regard to the first transmission channel, while China’s increase in industrial production has a large and
significant impact on oil and copper prices, the impact of the United States is greater and for all commodities.
This could be explained in two ways. First, China’s activity growth rate shock is weak and not as persistent as
that of the United States; and second, United States industrial growth has stronger spillover effects on the rest
of the world’s economic activity, and is important both for world commodity demand and consumption. On the
other hand, commodity-specific demand shocks of China and the United States do not have major effects on
commodity prices. This is because these shocks could be perceived as temporary and are accommodated
by changes in inventories elsewhere, and thus the effect on prices is dampened. Roache contends that, while
China’s impact on commodity prices is rising, this impact remains smaller than that of the United States. In
conclusion, he urges more caution when seeking to explain the causes of recent developments in commodity
market: while China’s impact might well increase depending on its future economic growth, the question remains
as to how big its effect will be on commodity prices.


a Apparent consumption is measured by the sum of commodity production and imports minus exports.




52


COMMODITIES AND DEVELOPMENT REPORT


Therefore, even with significant growth in Chinese
demand for commodities, given its relatively small
share of total imports of many commodities, shrink-
ing demand from the rest of the world can lead to
dramatic falls in commodity prices as occurred in
2008– 2009. Nonetheless, as commodity market
expectations underlying price formation and dynam-
ics is always forward looking (not solely based on a
static share of demand) focusing on China’s rising
share in the growth of global demand may be a bet-
ter reflection of its potential impact on price dynam-
ics. Indeed, Figure 2.25 shows that China’s growing
demand (albeit from a relatively low base) during
the period 1995–2010 accounted for an increas-
ing share of global demand for a number of com-
modities. However, given that Chinese boom-bust
demand cycles for many other commodities (e.g.
wheat and maize) were countercyclical to those of
the United States, it is unlikely that China contributed
significantly to the price boom of all commodities
(Tang and Xiong, 2010).


In the long run, concerns about supply-side com-
modity shortages with respect to demand from
emerging markets must be placed in a historical
perspective. During the commodity price boom of
the 1970s, world economic growth was predicted
to become inevitably constrained by a shortage of
resource availability and by what is now called peak
oil (Meadows et al., 1972). Although the prices of oil
and other commodities increased substantially in
the early 1970s, this was followed by a significant
slowdown in world manufacturing production and by
two decades of excess supply and depressed com-


modity prices. This highlights the fact that periods
of imbalance between growth in manufactures and
commodity production do occur, which can be fa-
vourable in the short term, but can also have adverse
impacts on commodity prices in the medium term.62


b. ChINA’S IMPACT
ON ThE PRICES Of
MANufACTuRES


A contemporary factor that boosts the relative prices
of commodities is the extraordinarily limited increase
in the prices of manufactures in recent years relative
to rising commodity prices, in contrast to the com-
modity boom of the 1970s. Krichene (2008) notes
that between 1973 and 1980, as oil prices increased
at an annual average rate of 46.5 per cent, world-
wide consumer prices rose annually by 14 per cent.
In comparison, between 2003 and 2007, oil prices
rose at an annual average rate of 30.3 per cent and
other commodities, on average, by 23 per cent, but
with only an annual 3.3 per cent rise in consumer
prices worldwide. This could result from productivity
gains in manufacturing and processing which act as
a countervailing force against rising prices of manu-
factures, despite growing raw material costs. Or it
could result from low labour costs due to labour sur-
plus in Asian exporters of manufactures, which may
keep prices of manufactures down as productivity
growth exceeds income growth. Kaplinsky (2006)
estimates that 29.7  per cent of sectors in China63
experienced declining price trends in nominal terms
during the period 1988/89–2001 due to large labour
reserves placing downward pressure on wages.64


Figure 2.25. China’s share in world imports of selected commodities (per cent)


0


10


20


30


40


50


60


70


Iro
n


or
e


W
oo


l


Co
tto


n


Co
pp


er


Na
tu


ra
l r


ub
be


r


Al
um


in
iu


m
o


re
s


Ni
ck


el


Co
rk


&
w


oo
d


Zi
nc


Fu
el


s


Iro
n


&
st


ee
l


Fi
sh


&
c


ru
st


ac
ea


ns


Su
ga


r &
h


on
ey


M
ea


t


Co
co


a


M
ai


ze
, u


nm
ill


ed


W
he


at
, u


nm
ill


ed


Co
ffe


e


1995 2000
2005 2010


Pe
r c


en
t


Source: UNCTAD secretariat calculations based on UNCTADstat (accessed 6 December 2011).


China’s growing
demand during


the period 1995-
2010 accounted
for an increasing


share of global
demand for
a number of


commodities.




53


cHapter II: commodity boom and bust in histoRical peRspective: new twists


Figure 2.26. China’s share of world exports of manufactures, 1995–2010 ($ billion)


0


200


400


600


800


1 000


1 200


1 400


1 600


0


5


10


15


20


25


30


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


$
bi


lli
on


Pe
r c


en
t


Labour-intensive and resource-based manufactures
Manufactures with low skill and technology intensity
Manufactures with medium skill and technology intensity
Manufactures with high skill and technology intensity
Exports of manufactures ($ billion), right axis


Sources: ITC (2011), Trade Statistics database, for total value of exports; and World Bank, World
Development Indicators database 2011, for share of exports attributed to manufactures.


Disinflation effects of low labour costs in China on
manufactures globally can operate directly – by low-
ering costs of manufactured consumer goods and
inputs – and indirectly by exerting pressure on do-
mestic producers in import-competing industries to
lower prices in response to competition from China,
or otherwise lose market shares (Pain, Koske and
Sollie, 2006).65 Many manufacturing sectors located
in developed countries such as the United States are
struggling to compete and are losing their market
share to lower cost China-based producers (Engar-
dio, Roberts and Bremner, 2004). This is perhaps
reflected in the explosive growth in exports of Chi-
nese manufactures in recent years, from $235 bil-
lion in 2001 to $1.47  trillion in 2010 (figure 2.19).
Moreover, given import penetration from China, such
competition may act as a barrier to entry for regions
not yet engaged in production of manufactures in the
short term.


3.1.4. The growing role of TNCs in
international commodity trade


State participation in minerals and metals exploita-
tion has featured prominently in the development of
the mining and minerals sector internationally over
the past 50 years. With the post 2003 surge in com-
modity prices, there has been renewed enthusiasm,


particularly in developing countries for increased
state participation in these sectors. Nonetheless, the
nature of state participation varies considerably by
country and mineral (McPherson, 2010). The miner-
als sector is often considered by governments to be
of strategic economic importance, requiring a high
degree of state control (as a critical feedstock into
the domestic economy, e.g. iron and steel) or min-
erals which dominate the national economy (e.g.
diamonds in Botswana, copper in Chile and Zam-
bia). In 2010, fully or majority state-owned National
Oil Companies (NOC) accounted for 55 per cent of
world oil production and controlled 85  per cent of
proven oil reserves (Energy Information Administra-
tion, 2012). The importance of NOCs relative to in-
ternational oil companies such as Royal Dutch Shell,
Exxon Mobil etc., has grown due to their ownership
of proven reserves. Furthermore, some NOCs are as-
suming certain characteristics of TNCs by expanding
their operations into third countries.


In order to quickly acquire the requisite capital and
skills, many CDDCs have opted to realise their natu-
ral resource endowments through attracting foreign
TNCs, rather than mainly relying on domestic capital
(Box: 2.2). One evolving trend in commodity markets
in recent decades concerns the fast-growing role of
TNCs, including large commodity trading compa-
nies and financial institutions (e.g. bank and hedge


Chinese
manufactures
have achieved
high growth
exports, from
$235 billion
in 2001 to
$1.47 trillion in
2010.


In 2010, state-
owned National
Oil Companies
accounted for
55 per cent
of world oil
production and
controlled 85 per
cent of proven oil
reserves.




54


COMMODITIES AND DEVELOPMENT REPORT


funds), in global trade in commodities. Moreover,
there is a rising concentration of trade and vertical
integration of large firms (e.g. TNCs and supermar-
ket chains) in global value chains (GVCs). Mergers
and acquisitions have led to a dramatic reduction
in the number of firms that have significant market
shares of commodities such as cocoa, vegetable
oils, grains, fruit and bauxite. For example, the global
trade in bananas is dominated by three United States
TNCs which control 60 per cent of global production:
Chiquita (formerly United Fruit), which is the biggest
producer, followed by Dole Food, the world’s largest
producer and distributor of fresh fruit and vegetables
and Del Monte Fresh Produce. The first two firms,
together, effectively act as price-setters as they own
large banana plantations in Central America. These
are all vertically integrated firms, as they own (or
contract) plantations and sea transport facilities as
well as distribution networks in consuming coun-
tries. Since the 1990s, these companies have ex-
panded their banana plantations in South America,
and have purchased land in Asia and Africa to further
enhance output. Similarly, four TNCs control over
60 per cent of the global coffee market, while three
control 85 per cent of the world’s tea market (Action-
Aid and South Centre, 2008).


Growing TNC mergers and acquisitions (M&A) activity
is also leading to greater concentration in the miner-
als and metals sectors. Figure 2.27 shows that both
the volume and value of deals has grown steadily
since 2001. Although during the period 2010-2011
the growth in volume of M&A deals declined 10 per
cent, the value of M&A deals rose 43 per cent due
to the completion of 28 megadeals which accounted


for two-thirds of deal value. Recent examples of
this TNC trend include Rio Tinto’s acquisition of Riv-
ersdale Mining for $3.9  billion and China Niobium
Investment’s $2.0  billion acquisition of Companhia
Brasileira de Metalurgia e Mineração (CBMM) in
2011. There has also been substantial M&A activity
in the gold mining sector with 385 deals completed
during 2011, driving consolidation between mid-tier
mining companies and junior explorers to boost in-
vestment and production. Similarly, at the time of
writing, the commodities trading company Glencore
is in the process of completing a $70 billion merger
with the Swiss mining firm Xstrata66 (The Financial
Times, 2012). Glencore is the world’s largest com-
modities trading company, with a 2010 global mar-
ket share of 60 per cent in the internationally trad-
able zinc market, 50 per cent in the copper market,
9 per cent in the grain market and 3 per cent in the
oil market (The Telegraph newspaper, 2011).


TNCs operating within commodity chains are in-
creasingly associated with growing oligopolistic
market powers and market concentration, which
may create price distortions in several commodity
markets (Hoekman and Martin, 2012). This has not
been without costs to most developing countries’
commodity producers or companies, as they lack the
necessary financial muscle and expertise to com-
pete with those TNCs on an equal footing, as shown
in the example of TNCs in the cocoa-chocolate value
chain (Box: 2.3). There are two factors that can po-
tentially explain the increase in concentration and
integration of the cocoa export trade in West Africa.
First, local exporters have limited access to finance
compared with foreign companies. With the liberali-


Box 2.2. Foreign TNCs and CDDC natural resource development challenges


Many developing countries have opted to realise their natural resource endowments through attracting foreign
natural resource-seeking TNCs. However, this has come with some potential challenges:


• TNCs generally have global purchasing departments which are less likely to develop local suppliers (linkages),
than would probably be the case with domestic resource companies;


• TNCs tend to optimise their global processing (beneficiation) facilities which often denies the host country
their downstream opportunities;


• TNCs generally locate the technological innovation systems, research and development (R&D) in OECD
countries, with the requisite skills and incentives, thus potentially reducing CDDCs domestic capacity
development opportunities;


• TNCs also tend to locate their high level human resource development in OECD countries (often linked to their
R&D university partners), again reducing CDDCs potential domestic capacity development opportunities;
and


• There is also a TNC “core competence” conundrum, where the increasing international tendency of resource-
seeking TNCs to concentrate exclusively on resource extraction could possibly reduce CDDCs development
opportunities of growing indigenous diversified conglomerates.


Source: Sigam and Garcia (2012); Jourdan, (2008).


There is a rising
concentration of


trade and vertical
integration of


large firms (e.g.
TNCs) in global


value chains.


Three TNCs
control 60 per
cent of global


banana
production. Three


TNCs control
85 per cent of
the world’s tea


market. Four
TNCs control


around 60 per
cent of the global


coffee market.




55


cHapter II: commodity boom and bust in histoRical peRspective: new twists


Box 2.3. Vertical integration and horizontal concentration within the cocoa-chocolate global value chain


Examining the evolution of the structural configuration of the cocoa-chocolate supply chain is important for
understanding the changes in the bargaining power of the stakeholders along that chain. Furthermore, it provides
insights into the assessment of how these structural innovations could have affected cocoa producers in the region.


The domestic cocoa market structure in Cameroon, for example, is divided into production and commercialization
segments. The main activities of the farmers, who are the main producers, include maintenance of the farm,
harvesting, fermentation, drying, bagging, and in some cases transport of the cocoa beans to upcountry delivery
points. The largest cost components are related to labour and material inputs. Commercialization involves the
distribution of the cocoa from the farmers to international purchasers via two intermediary stages: so-called
“internal marketing”, which refers to local collection at farm gate to delivery to the port of export; and “external
marketing”, which consists of shipment for export.


Over the past decade, the chain has undergone significant changes, especially in terms of customers on the export
market. While in the past, importers were the first to purchase cocoa that would then be sold to cocoa processors and
manufactures, now, it is difficult to separate merchants from industrial users. Indeed, at present, the largest processors
and manufactures are the leading international purchasers of cocoa in export markets. Moreover, these foreign trading
and processing companies in Cameroon are closely associated with, and sometimes even subsidiaries of, TNCs
(e.g. Société Industrielle Camerounaise des Cacaos, the country’s most notable processor owned by Swiss-based
Barry Callebaut, a major chocolate processor and manufacture). In addition, horizontal concentration has taken place
in external marketing, where a small number of big private exporters have come to dominate the export market. In
Cameroon, more than 60 per cent of exports declared in 2006-2007 were handled by the four largest exporters.


At the international level, the chocolate manufacturing sector and the consumer market for chocolate have also
undergone considerable changes, most importantly in the areas of cocoa trading, processing and the market for
industrial chocolate.


There are two main developments with regards to cocoa trading: (i) the main trading companies have taken over cocoa
exporting operations within producing countries, their reach sometimes extending all the way to the farm level, either
directly or through agency relationships; and (ii) large trading companies are also engaged in processing. Indeed, there
are very few international firms that concentrate just on trading operations in the cocoa sector. Hence, cocoa traders
are more vertically integrated, both upstream to the farmer level and downstream in processing.


In cocoa processing, changes have occurred mainly in the grinding segment. Traditionally, this was controlled
by manufacturers, but as these rapidly retreated because of falling profits, trading companies took over these
operations. This has resulted in a new pattern of vertical integration. The grinding segment is also highly
concentrated in order to obtain both economies of scale and scope. Currently, two thirds of all grinding is done
by the top 10 firms, with the four largest cocoa processing companies (Archer-Daniels-Midland Company (ADM),
Cargill, Bloomer and Barry Callebaut) dominating the market.


The evolution of the market for industrial chocolate perhaps best reflects the changes undergone by the cocoa
trading and processing segments. Producers of industrial chocolate fall into two categories: (i) vertically integrated
groups which produce their industrial chocolate and mainly use it in-house to make consumer products; and (ii)
industrial processors that supply most of their industrial chocolate to market suppliers.


The market for the production of industrial chocolate is highly concentrated: about three- quarters of couverture
(a very high quality chocolate containing extra cocoa butter) is supplied by just four companies: Barry Callebout,
Cargill, Bloomer and ADM, with Barry Callebout alone claiming a market share of roughly 40 per cent. These four
top ranking companies were also found to account for almost half of cocoa grinding in the world.


This new structural configuration has resulted in some imbalances in bargaining power between actors at various
stages along the cocoa value chain. Specifically, small producers in developing producing countries have been
negatively affected because the market power of the large TNCs has limited both their reach to the global market
and the benefits accruing from international trade.
Source: UNCTAD (2008).




56


COMMODITIES AND DEVELOPMENT REPORT


zation of the sector, private commercial banks in the
producing country became reluctant to finance local
operators and set more demanding credit condi-
tions. As a result, local exporters sought affiliation
with foreign trading and processing companies from
which they could receive financing at lower interest
rates. Second, the economies of scale in transporta-
tion through bulk shipments resulted in major cost
savings. At the same time, bulk trade reinforced the
competitive position of the large TNCs (see Box: 2.3).


Clearly CDDCs need to escape the poverty trap stem-
ming from an excessive dependence on commodi-
ties. However, simply linking producers to GVCs67
dominated by TNCs is unlikely to bring about the di-
versification and structural transformation they seek.
It serves merely to further entrench the burgeoning
bargaining power of the TNCs at the expense of of-
ten diverse and fragmented commodity producers.
To avoid being trapped on a low-growth, commodi-
ty-dependent path, where the maintenance of future
competitiveness is based on a race to the bottom,68
these countries will need to adopt new technologies
and skill-intensive processes to assist diversification
into manufacturing. As most GVCs are increasingly
TNC- and buyer-driven (particularly in agricultural
products but also in the extractive sector), result-
ing in the latter capturing most of the value added
and controlling technology in the processing, dis-
tribution and marketing elements of the chain, CD-
DCs will need to create linkages with these entities
that incorporate greater technology and knowledge
transfer as well as value retention for their produc-
ers (Sigam and Garcia, 2012). If the CDDCs are to
gain a greater share of the value generated from
their commodities, avoid commodity dependence
and upgrade into higher value added products, they


will need to harness their potential for economic and
industrial upgrading through effective public-private
partnerships and an industrial policy flexible enough
to respond to a rapidly changing global economy.


3.2. Some policy responses
In the United States, the Dodd-Frank Wall Street Re-
form and the Consumer Protection Act in 2010 have
mandated greater financial market regulation, which
includes improving transparency in the OTC deriva-
tives markets. However, changes in reporting regula-
tions remain to be implemented. In the EU also, the
European Commission has made a proposal for in-
creased regulation of OTC derivatives trading. How-
ever, as European commodity futures exchanges are
relatively less regulated than in the United States,
they remain unpredictable for commercial hedgers
and non-swap dealer speculators, which limits the
scope for research and regulation.


Episodes of extreme volatility in commodity markets
and unexpected price swings had prompted collabo-
rative global action in search of solutions. Agriculture
ministers from the Group of Twenty (G20) leading
economies, under the presidency of France, met in
Paris on 22-23 June 2011 and released a Ministerial
Declaration, aptly entitled the Action Plan on Food
Price Volatility and Agriculture, which was presented
to G20 leaders at their summit in November 2011.
The centrepiece of the eight-point Action Plan is the
proposed Agricultural Market Information System
(AMIS).69 The Action Plan seeks, primarily, to address
high and volatile food prices through tougher regula-
tion of speculative investments in commodity mar-
kets, government mandates on biofuels and other
pressing food security issues.


Figure 2.27. Value and volume of deals in the global mining and metals sector, 2000-2011 ($ billion)


0


200


400


600


800


1 000


1 200


0


50 000


100 000


150 000


200 000


250 000


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


20
11


Va
lu


e
of


d
ea


ls
($


b
ill


io
n)


Value of deals Volume of deals


Vo
lu


m
e


of
d


ea
ls


Source: Ernst and Young (2012).


Most CDDCs
producers or


companies lack
the financial
muscle and
expertise to


compete with
TNCs on an equal


footing.


Simply linking
producers to
global value


chains dominated
by TNCs is
unlikely to


bring about the
diversification
and structural


transformation
CDDCs seek.


In the future,
CDDCs will need


to create linkages
with TNCs that


incorporate
greater


technology
and knowledge


transfer as well as
value retention for


their producers.




57


cHapter II: commodity boom and bust in histoRical peRspective: new twists


One of the recommendations made by FAO et al.
(2011) relates to improving spot market transparen-
cy in food markets under the AMIS through interna-
tional cooperation in providing timely and accurate
data on food production, consumption and stock lev-
els. Such information would enable the creation of a
global early warning system and help prevent future
food crises. This proposal has been welcomed by
G20 leaders. This scheme is particularly important
for anchoring spot market price expectations, and
could prevent speculative price bubbles driven by
futures markets by reducing fundamental market
uncertainty. This is because, once AMIS is in opera-
tion, if futures prices rise excessively, beyond what
is justified by publicly announced current production,
use and stock levels, commercial wholesalers and
food processors will be less inclined to hoard in re-
sponse to spikes in futures prices, unless they are
justified by the published market fundamentals. In
this case, any bubble in futures prices will not be fol-
lowed by higher spot prices, providing potential arbi-
trage opportunities which would bring down futures
prices in convergence with spot prices. This conver-
gence should theoretically take place, since, if the
futures price is higher than the spot price towards
expiry of the futures contract, an arbitrager could
buy the underlying commodity in the spot market
and deliver the physical commodity (through a short
position) in the futures market at the higher futures
price, thereby yielding risk-free profit. In practice
however, in the United States there has been con-
sistent non-convergence between futures prices and
spot prices in wheat, maize and soybean markets in
recent years (USDA, 2009). This issue remains unre-
solved and requires further research.


A further recommendation seeks to ensure greater
transparency in commodity futures and OTC markets
and implement appropriate regulations aimed at im-
proving their functioning and ensuring harmonization
across exchanges in order to avoid regulatory arbi-
trage. This would be not only with respect to agri-
cultural commodities but to commodities in general.
G20 agricultural ministers did not address this issue
directly, but rather passed on the recommendation for
review by finance ministers. This recommendation is
of particular importance if the issue of financialization
is to be tackled, as futures prices continue to have
material effects on spot market expectations in the
formation of commodity price bubbles.


With regard to biofuels, the G20 draft recommen-
dation was that they should “remove provisions of
current national policies that subsidize (or mandate)
biofuels production or consumption”. However, this
recommendation met with strong resistance from
the largest producers of biofuels. G20 leaders ulti-
mately agreed only on the need for further research
on the relationship between biofuels and food avail-


ability. This was a rather disappointing result, given
that 15 per cent of the world’s maize is already used
as feedstock for biofuels, up from less than 5  per
cent in 2003/04 (Figure 2.20).


Notwithstanding the fact that speculators have pro-
vided market liquidity which has increasingly driven
commodity prices in the last decade or so (see chap-
ter 3, section 1.3), the role of the fundamentals of
supply and demand cannot be completely discount-
ed in commodity price formation. In this regard,
improved market transparency regarding the levels
of supply and demand as well as stock levels will
almost certainly help commodity markets to clear at
more realistic price levels.


However, it is also important to ensure sufficient levels
of supply to match anticipated demand by increasing
the levels of investment in and efficiency of commod-
ity production. Indeed, sustained levels of investment
in commodity production will help to reduce the vul-
nerability of commodity markets to the impact of huge
financial flows and associated market liquidity (and
other shocks) that could exacerbate spikes in prices,
as in recent years. This is particularly important con-
sidering that some of the imbalance in supply and de-
mand for commodities during the current boom could
be traced to supply shortfalls, which was partly due
to insufficient investment in the commodities sector
over the past quarter of a century due to generally low
prices. Considering that the stock levels of almost all
commodities are at historic lows, a strong and sus-
tained growth of supply would also help replenish
stocks, thus removing one of the potential sources of
stress on commodity prices.


One major characteristic of commodity markets in
recent years has been the fast growing role of TNCs,
including huge commodity trading companies and
financial institutions, and the associated increase
in oligopolistic power and market concentration,
which may create price distortions (see, for exam-
ple, Hoekman and Martin, 2012). This has been to
the detriment of most developing countries’ compa-
nies which lack the necessary financial muscle and
expertise to compete on an equal footing. Reducing
this sort of imperfect competition and associated
price distortions might entail the application of anti-
competitive or anti-trust legislation, possibly within
the framework of the WTO. Specifically, in the case
of agricultural commodities, much tighter discipline
in the use of policies that distort global agricultural
commodity markets is necessary. However, it re-
mains to be seen if this could be achieved through
full liberalization of global trade in agriculture in the
context of the Doha Round.


The excessive volatility of commodity prices gives
rise to considerable uncertainty in the short and
medium term, leading to higher insurance costs


Notwithstanding
the fact that
speculators have
provided market
liquidity which
has increasingly
driven commodity
prices in the
last decade, the
role of market
fundamentals
cannot be
completely
discounted in
commodity price
formation.


Improved market
transparency
regarding the
levels of supply
and demand as
well as stock
levels would
certainly help
commodity
markets to clear
at more realistic
price levels.




58


COMMODITIES AND DEVELOPMENT REPORT


and increased risks associated with investment in
natural resource sectors. Moreover, volatility cre-
ates uncertainty, which limits access to capital for
investing in the expansion of commodity produc-
tion, especially when agents are not in a position
to collateralize their loans. This also means that,
increasingly, government revenues generated from
commodity production in developing countries
have been set aside as insurance against volatile


prices, as opposed to providing a steady stream of
income to fund investment in economic diversifica-
tion. Furthermore, volatility in food prices is espe-
cially harmful to food security and to social and po-
litical stability in developing countries, where food
accounts for a larger share of consumer spending
than in industrialized economies. Some of these
issues are addressed in the next chapter of this
report.


Increasingly,
government


revenues from
commodity


production in
CDDCs have not


been used to
fund investment


in economic
diversification.




59


cHapter II: commodity boom and bust in histoRical peRspective: new twists


0


50


100


150


200


250


300
01


-1
97


0
01


-1
97


3
01


-1
97


6
01


-1
97


9
01


-1
98


2
01


-1
98


5
01


-1
98


8
01


-1
99


1
01


-1
99


4
01


-1
99


7
01


-2
00


0
01


-2
00


3
01


-2
00


6
01


-2
00


9


Pr
ic


e
in


de
x


(2
00


0=
10


0)


Agricultural Raw Materials
Linear (Agricultural Raw Materials)


0


50


100


150


200


250


300


350


400


01
-1


97
0


01
-1


97
3


01
-1


97
6


01
-1


97
9


01
-1


98
2


01
-1


98
5


01
-1


98
8


01
-1


99
1


01
-1


99
4


01
-1


99
7


01
-2


00
0


01
-2


00
3


01
-2


00
6


01
-2


00
9


Pr
ic


e
in


de
x


(2
00


0=
10


0)


Crude petroleum*
Linear (Crude petroleum*)


0
50


100
150
200
250
300
350
400
450
500


01
-1


97
0


01
-1


97
3


01
-1


97
6


01
-1


97
9


01
-1


98
2


01
-1


98
5


01
-1


98
8


01
-1


99
1


01
-1


99
4


01
-1


99
7


01
-2


00
0


01
-2


00
3


01
-2


00
6


01
-2


00
9


Pr
ic


e
in


de
x


(2
00


0=
10


0)


Food
Linear (Food )


0


50


100


150


200


250


300


350


01
-1


97
0


01
-1


97
3


01
-1


97
6


01
-1


97
9


01
-1


98
2


01
-1


98
5


01
-1


98
8


01
-1


99
1


01
-1


99
4


01
-1


99
7


01
-2


00
0


01
-2


00
3


01
-2


00
6


01
-2


00
9


Pr
ic


e
in


de
x


(2
00


0=
10


0)


Minerals, Ores and Metals
Linear (Minerals, Ores and Metals)


0


100


200


300


400


500


600


700


800


01
-1


97
0


01
-1


97
3


01
-1


97
6


01
-1


97
9


01
-1


98
2


01
-1


98
5


01
-1


98
8


01
-1


99
1


01
-1


99
4


01
-1


99
7


01
-2


00
0


01
-2


00
3


01
-2


00
6


01
-2


00
9


Pr
ic


e
in


de
x


(2
00


0=
10


0)


Tropical beverages
Linear (Tropical beverages)


0


100


200


300


400


500


600


01
-1


97
0


01
-1


97
3


01
-1


97
6


01
-1


97
9


01
-1


98
2


01
-1


98
5


01
-1


98
8


01
-1


99
1


01
-1


99
4


01
-1


99
7


01
-2


00
0


01
-2


00
3


01
-2


00
6


01
-2


00
9


Pr
ic


e
in


de
x


(2
00


0=
10


0)


Vegetable oilseeds and oils
Linear (Vegetable oilseeds and oils )


Appendix 1. Evolution of real price indices of commodities, 1970–2011 (2000=100)


Source: UNCTAD secretariat calculations based on UNCTADstat.
Note: Data for 2011 cover the period January to June.
Note: Crude petroleum, average of UK Brent (light), Dubai (medium) and Texas (heavy), equally weighted


($/barrel)
Note: To compute prices in constant terms, the deflator used is the unit value index of manufactured goods


exports by developed market-economy countries (United Nations Statistical Division).
Note: The UNCTAD secretariat also applied the Hodrick-Prescott filter to the above commodity sub-


categories which smoothed long term trend lines by filtering short-term fluctuations, which confirmed
the above trends (see Hodrick R and Prescott E (1997). Postwar U.S. Business Cycles: An Empirical
Investigation. Journal of Money, Credit, and Banking, 29 (1), 1–16.).




60


COMMODITIES AND DEVELOPMENT REPORT


refereNces


Abbot PC, Hurt C and Tyner WE (2008). What’s driving food prices? Oak Brook, IL, Farm Foundation.


ActionAid and South Centre (2008). Commodity dependence and development: Suggestions to tackle the commodities problem.
Geneva; available at: http://southcentre.org/.


Akram F (2008) Commodity prices, interest rates and the dollar. Norges Bank Working Paper, Oslo.


Akyüz Y (2011). Capital flows to developing countries in a historical perspective: Will the current boom end in a bust? South Centre
Research Paper, 37, Geneva; available at: www.southcentre.org/index.php?option=com_docman&task=doc_download&gid=
1974&Itemid=182&lang=es.


Baffes J and T Haniotis (2010). Placing the 2006/08 commodity price boom into perspective. Policy Research Working Paper
5371,World Bank, Washington, DC.


Barsky RB and Kilian L (2002). Do we really know that oil caused the great stagflation? A monetary alternative. In: Bernanke BS and
Rogoff K, eds. NBER Macroeconomics Annual 2001, volume 16: 137–198. Cambridge. MA, MIT Press.


Bernanke BS (2005). The global saving glut and the U.S. current account deficit. Sandridge Lecture to the Virginia Association of
Economists, Richmond, VA, March 10; available at: http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/.


Blanchard OJ and Riggi M (2009). Why are the 2000s so different from the 1970s? A structural interpretation of changes in the
macroeconomic effects of oil prices. NBER Working Paper No. 15467, National Bureau of Economic Research, Cambridge, MA.


Calvo G (2008). Exploding commodity prices, lax monetary policy, and sovereign wealth funds; available at: http://www.voxeu.org/
index.php?q=node/ 1244.


Cashin P, McDermott CJ and Scott A (1999). The myth of comoving commodity prices. IMF Working Papers 99/169, IMF, Washington, DC.


Cashin P, Hong Liang and McDermott CJ (1999). How Persistent are shocks to world commodity prices? IMF Working Papers 99/80,
IMF, Washington, DC.


Cashin PC, McDermott CJ and Scott A (2002). Booms and Slumps in World Commodity Prices. Journal of Development Economics,
69: 277–296.


CME (2011). CFTC Commitments of Traders Report, Update February 24; available at: http://www.cmegroup.com/education/files/
COT-FBD-Update.pdf.


Collins K (2008). The role of biofuels and other factors in increasing farm and food prices: A review of recent developments with
a focus on feed grain markets and market prospects. Prepared as supporting material for a review conducted by Kraft Foods
Global, Inc; available at: http://www.globalbioenergy.org/uploads/media/0806_Keith_Collins_-_The_Role_of_Biofuels_and_
Other_Factors.pdf


CRS (2006). European Union biofuels policy and agriculture: An overview. Congressional Research Service Report for Congress,
Washington, DC.


Davidson P (2008). Crude oil prices: “Market fundamentals” or speculation? Challenge, 51(4): 110–118.


Engardio P, Roberts D and Bremner B (2004). The China price. BusinessWeekMagazine, Special report, Bloomberg, 6 December;
available at: http://www.businessweek.com/magazine/content/04_49/b3911401.htm.


Ernst and Young (2009). Mining and metals in adversity, May. Available at: www.ey.com/miningmetals


Ernst and Young (2012). Mergers, acquisitions and capital raising in mining and metals 2011 trends and 2012 outlook: Recognizing
value in volatility. Available at: www.ey.com/miningmetals


Farooki M and Kaplinsky R (2012). The Impact of China on Global Commodity Prices. Oxford and New York, Routledge.


Federal Reserve (2011). Minutes of the Federal Open Market Committee. The Board of Governors of the Federal Reserve
System. Washington, DC, 1–2 November 2011; available at: http://www.federalreserve.gov/newsevents/press/monetary/
fomcminutes20111102.pdf


Federal Reserve (2012). Flow of funds accounts of the United States. Flow of funds summary statistics, second quarter 2012. Board
of Governors of the Federal Reserve System, Washington DC.


Financial Times (2012). Trade body warns on Glencore merger, 22 November; available at: http://www.ft.com/intl/cms/s/0/60ad2f62-
34cf-11e2-8986-00144feabdc0.html#axzz2ECJjq7dc




61


Flammini A (2008). Biofuels and the underlying causes of high food prices. Rome, Global Bioenergy Partnership.


FAO (2008). High prices or food crisis? Context and perspectives. Paper prepared for Conference on Climate Change, Energy and
Food: A High-Level Conference on Food Security, the Challenges of Climate Change and Bioenergy, Rome, 3–5 June 2008.


Frankel AF (2008). The effect of monetary policy on real commodity prices. In: Campbell JY, ed. Asset Prices and Monetary Policy.
Chicago, IL, University of Chicago Press: 291–333. Also published as NBER Working Paper No. 12713, Dec. 2006.


Gilbert CL (2010a). How to understand high food prices. Journal of Agricultural Economics, 61(2): 398–425.


Gilbert CL (2010b). Speculative influences on commodity futures prices, 2006–2008. UNCTAD Discussion Paper no. 197. Geneva, UNCTAD.


Greer RJ (2000). The nature of commodity index returns. The Journal of Alternative Investments, 3(1), Summer: 45–52.


Hoekman B and Martin W (2012). Reducing distortions in international commodity markets. Economic Premise, 82. Economic
Premise, Poverty Reduction and Economic Management Network (PREM), World Bank, Washington, DC.


ICCO (2010). Quarterly Bulletin of Cocoa Statistics (various Issues). London, International Cocoa Organization.


IEA (2009). The impact of the financial and economic crisis on global energy investment. Paris, International Energy Agency;
available at: www.iea.org/ebc/files/impact.pdf.


ILO (2008). InternationalLabourStandards:TheInternationalLabourOrganization’sFundamentalConventions; available at: http://
www.ilo.org/wcmsp5/groups/public/---ed_norm/---declaration/documents/publication/wcms_095895.pdf.


IMF (2008). World Economic Outlook: Housing and the Business Cycle. Washington, DC.


Irwin SH. and Sanders DR (2010). The impact of index and swap funds on commodity futures markets: Preliminary results. OECD
Food, Agriculture and Fisheries Working Papers, No. 27, OECD Publishing, Paris.


Isidore C (2011). Bernanke: Fed’s actions led to stock rally; available at: http://money.cnn.com/2011/01/13/news/economy/
bernanke_qe2_stock_market/index.htm.


International Trade Centre (2012). Trade Statistics database, at: http://www.intracen.org/.


Jourdan P (2008). Challenges of LDC resource-based development. Study prepared for UNCTAD as a background paper for
The Least Developed Countries Report 2009, New York and Geneva.


Joyce M, Tong M and Woods R (2011). The United Kingdom’s quantitative easing policy: design, operation and impact. Bank of
England Quarterly Bulletin, 51(3): 200–212.


Kaldor N (1939). Welfare propositions in economics and interpersonal comparisons of utility. The Economic Journal, 49(195): 549–552.


Kaplinsky R (2006). Revisiting the revisited terms of trade: Will China make a difference? World Development, 34(6): 981–995.


Kaplinsky R and Farooki M (2009). Africa’s Cooperation with New and Emerging Development Partners: Options for Africa’s
Development. New York, United Nations Department of Economic and Social Affairs (DESA).


Kaplinsky R and Farooki M (2010). What are the implications for global value chains when the market shifts from the North to the
South? Policy Research Working Paper 5205, World Bank, Washington, DC.


Kaplinsky R and Morris M (2008). Do the Asian drivers undermine export-oriented industrialisation in SSA? World Development,
36(2), pp. 254–273.


Keynes JM ([1936] 1973). The general theory of employment interest and money. In: Moggridge DE, ed. The Collected Writings of
John Maynard Keynes, vol. VII. London, Macmillan: 109–123.


Krichene N (2008). Recent inflationary trends in world commodity markets. IMF Working Paper 08/130, IMF, Washington, DC.


Lewis AW (1954). Economic development with unlimited supplies of labour. Manchester School of Economics and Social Studies,
22: 139–191.


Liu H, Patron KA, Zhou Z, Cox R (2009). At-home meat consumption in China: An empirical study. Australian Journal of Agricultural
and Resource Economics, 53(4): 485–501.


Maizels A (1992). Commodities in Crisis: The Commodity Crisis of the 1980s and the Political Economy of International Commodity
Policies. Oxford, Clarendon Press.


Manchester Trade Team (2005). Impact of the end of MFA quotas and COMESA’s textile and apparel exports under AGOA: Can the
Sub-Saharan Africa textile and apparel industry survive and grow in the post-MFA World? Report prepared for USAID East and
Central Africa Global Competitiveness Trade Hub.


cHapter II: commodity boom and bust in histoRical peRspective: new twists




62


COMMODITIES AND DEVELOPMENT REPORT


Masters MW and White AK (2008). The accidental Hunt brothers: how institutional investors are driving up food and energy prices.
White paper; available at: http://www.loe.org/images/content/080919/Act1.pdf.


Maurice N and Davis J (2011). Unravelling the underlying causes of price volatility in world coffee and cocoa commodity markets.
UNCTAD Working Paper Series on Commodities and Development, UNCTAD, Geneva.


Mayer J (2009). The growing interdependence between financial and commodity markets. UNCTAD Discussion Paper no. 195,
UNCTAD, Geneva.


McKinnon R (1982). Currency substitution and instability in the world dollar standard. The American Economic Review, 72(3):
320–333.


McKinnon R (2011). The latest American export – Inflation: In 2010, prices rose by more than 5% in major emerging markets such
as China, Brazil and Indonesia. Wall Street Journal, 18 January; available at: http://online.wsj.com/article/SB1000142405274
8704405704576064252782421930.html.


McPherson C (2010). State participation in the natural resources sectors – evolution, issues, and outlook, in Daniel P, Keen M,
and McPherson C, eds. The Taxation of Petroleum and Minerals: Principles, Problems and Practice, Routledge: 263-288.


Meadows DH, Meadows DL, Randers J and Behrens III WW (1972). The Limits to Growth. New York, Universe Books.


Mitchell D (2008). A note on rising food prices. Policy Research Working Paper 4682, World Bank, Washington, DC.


Morgan PJ (2011). Impact of US quantitative easing policy on emerging Asia. ADBI Working Paper 321, Asian Development Bank
Institute, Tokyo; available at: http://www.adbi.org/working-paper/2011/11/18/4796.impact.us.quantitative.easing.policy.
emerging.asia/.


Morrison W (2011). China-U.S. trade issues. CRS Report for Congress. Congressional Research Service, Washington, DC; available
at: http://www.fas.org/sgp/crs/row/RL33536.pdf.


Nissanke M (2010). Commodity markets and excess volatility: Sources and strategies to reduce adverse development impacts.
Paper prepared for the Common Fund for Commodities; available at: http://www.cfc-brussels.org/pdf/1102251406_Prof.
Nissanke-CFCPaperNOV-2010.pdf.


Nissanke M (2012). Recent development in commodity Markets: Excess Volatility and Development Impacts. Presentation at the
UNCTAD Multi-year Expert Meeting on Commodities and Development, 25 - 26 January 2012, Geneva.


Page S and Hewitt A (2001). World commodity prices: still a problem for developing countries? London, Overseas Development
Institute.


Pain N, Koske I and Sollie M (2006). Globalisation and inflation in the OECD economies. OECD Working Papers No. 524, OECD, Paris.


PwC (2011). You Can’t Always Get What You Want: Global Mining Deals 2010. PriceWaterhouseCoopers LLP Publications.


Radetzki M (2006). The anatomy of three commodity booms. Resources Policy, 31(1): 56–64.


Roache KS (2012). China’s impact on world commodity markets. IMF Working Paper, WP/12/115, IMF, Washington, DC.


Robles M, Torero M and von Braun J. (2009). When speculation matters: Sustainable solutions for ending hunger and poverty, Issue
Brief 57, February, International Food Policy Research Institute, Washington, DC. Roubini N (2009). The coming commodities
correction. An interiew with Lara Crigger of Hard Assets Investor, 6, November 2009; available at: http://www.hardassetsinvestor.
com/interviews/1846-nouriel-roubini-the-coming-commodities-correction.html?showall=&fullart=1&start=3.


Sigam C and Garcia L (2012). Extractive industries: Optimizing value retention in host countries (UNCTAD/SUC/2012/). New York and
Geneva, United Nations; available at: http://unctadxiii.org/en/SessionDocument/suc2012d1_en.pdf.


Stiglitz JE (2007). What is the role of the state? In: Humphreys M, Sachs JD and Stiglitz JE, eds. Escaping the Resource Curse.
New York, Columbia University Press: 23–52.


Tang K and Xiong W (2010). Index investment and financialization of commodities. NBER Working Paper No. 16385, National Bureau
of Economic Research, Cambridge, MA.


Taylor L (1979). Macro Models for Developing Countries. New York, McGraw-Hill: xii+271.


Telegraph Newspaper (2011). Glenore’s share of global commodity markets, 15 April; available at: http://www.telegraph.co.uk/
finance/commodities/8451991/Glencores-share-of-global-commodity-markets.html


Thomas A, Muhleisen M and Pant M (2010). Peaks, spikes, and barrels: Modeling sharp movements in oil prices. IMF Working Paper
WP/10/186, IMF, Washington, DC.




63


Thomson Reuters (2011). China inflation, growth cool, heralding rate pause; available at: http://www.reuters.com/article/2011/09/09/
us-china-economy-inflation-idUSTRE7881D020110909.


UNCTAD (2003). Economic Development in Africa: Trade Performance and Commodity Dependence (UNCTAD/GDS/AFRICA/2003/1),
sales no. E.03.II.D.34. New York and Geneva, United Nations.


UNCTAD (2007). World Investment Repor,: Transnational Corporations, Extractive Industries and Development. New York and
Geneva, United Nations.


UNCTAD (2008). Cocoa Study: Industry Structures and Competition. UNCTAD/DITC/COM/2008/1. New York and Geneva, United
Nations.


UNCTAD (2009). Trade and Development Report: Responding to the Global Crisis, Climate Change Mitigation and Development.
New York and Geneva, United Nations.


UNCTAD (2011). Price Formation in Financialized Commodity Markets: The Role of Information. (UNCTAD/GDS/2011/1). New York
and Geneva, United Nations.


Wall Street Journal (2011). The great property bubble of China may be popping, 9 June; available at: http://online.wsj.com/article/
SB10001424052702304906004576367121835831168.html?mod=WSJAsia_hpp_LEFTTopStories.


Wise TA (2012). The cost to developing countries of U.S. corn ethanol expansion. Global Development and Environment Institute
Working Paper no. 12-02. Tufts University, Medford MA 02155, USA; available at: http://ase.tufts.edu/gdae


Wright (2009). International grain reserves and other instruments to address volatility in grain markets. World Bank WPS 5028;
available at: http://policydialogue.org/files/events/Wright_International_Grain_Reserves.pdf.


cHapter II: commodity boom and bust in histoRical peRspective: new twists




64


COMMODITIES AND DEVELOPMENT REPORT


NOTES
1. The UNCTAD secretariat analysed commodity subcategories separately and controlling for short-term fluctuations using the


Hodrick-Prescott Filter, observed prolonged and significantly higher real prices for agricultural raw materials, beverages and
food commodities in the 1970s.


2. There is evidence of adverse weather and supply shocks for certain food commodities in the 1973/74 crop year (FAO, 2008)
and for coffee and cocoa in 1977/78 (ICCO, 2010; Maurice and Davis, 2011).


3. In fact, the price hikes of the recent boom have brought real prices back to the levels they were during most of the 1960s.


4. Barsky and Kilian (2002) maintain that the 1970s boom was not solely due to crop failures and supply shocks by the members
of the Organization of the Petroleum Exporting Countries (OPEC), but rather to a market correction: an increase in prices
following a growth in industrial demand and expansionary monetary policies led by the United States. This is why it was not
only oil prices that increased, but also commodity prices more broadly.


5. Even in the short term, due to the short-run inelasticity of supply of commodities, as opposed to manufactured goods, monetary
easing can have a particularly strong effect on commodity prices.


6. Morgan (2011) estimates that “about 40 per cent of the increase in the monetary base in the (US) Quantitative Easing 1 period
[from about November 2008 to November 2010] leaked out in the form of increased gross private capital outflows (about
$32 billion per quarter) and about one-third (about $74 billion) leaked out during the first two quarters of the Quantitative
Easing 2 period [starting in November 2010].”


7. However, busts followed each boom. The first in the early 1980s was due to a tightening of monetary policy in the United States
and resulted in a debt crisis in Latin America. The second in 2009 was a result of a subprime credit and asset bubble crisis, the
collapse of the Lehman Brothers bank and a flight to safety in commodities (especially metals).


8. A discussion of private capital flows is included in chapter 4.


9. World Bank, World Development Indicators database (accessed 30 June 2011).


10. This in turn may have implications for future patterns of South-South commodity trade, as China and India become major
sources of demand for food, mineral and metals with different, perhaps less demanding, standards than those of the OECD
countries.


11. Historically economic growth has been very energy-intensive with the industrial sector being one of the principal users of
energy. However, energy intensity has been declining over time due to technological progress (Farooki and Kaplinsky, 2011).


12. It could be argued that this capital inflow did not lead to an appreciation of the dollar, at least to some extent because of the
Triffin dilemma, according to which, when a national currency is used as the international reserve, reserve accumulation by
other economies will lead the country in question to run a structural current-account deficit. The country printing the reserve
currency enjoys cheap access to funds due to its status, but the structural deficit will simultaneously lead to a weakening of
the currency. In addition, United States monetary policy was quite expansionary during this period (broad money grew at an
average of 6.6 per cent per annum during the period 2000–2009, compared with 4.7 per cent during the period 1990–1999),
thereby reducing some of the pressure on the exchange rate.


13. Although the focus here is on low real interest rates causing a rise in commodity prices, in principle this could also encourage
more supply and lower prices, but with a lag considering the gestation period of projects.


14. Low real interest rates may also lead to an increase in investments and raise aggregate demand, thereby leading to higher
demand for commodities.


15. Frankel (2008) notes that higher interest rates provide an incentive to extract at a faster rate to earn interest from current
revenues.


16. The cost of carry model summarizes the link between the spot price and the (theoretical) futures price for a commodity.
UNCTAD (2011: 3) notes that market participants who need a certain commodity at a future time, can either buy it in the spot
market today and store it, or buy (i.e. take a long position in) a futures contract and take delivery when the contract expires. In
the former case, the participants will incur storage costs and opportunity costs because they might alternatively have invested
the funds used to buy the commodity at the prevailing interest rate. The futures price should thus be equal to the spot price
plus interest and storage cost – the so-called cost of carry.


17. See Kaldor (1939) for a discussion of the convenience yield of holding commodity inventories.


18. Keynes (1936) was aware of this asymmetry, noting that the real effective interest rate faced by buyers and sellers in the
commodity market was determined by the nominal rate less the expected rise in commodity prices, in other words, the




65


real commodity rate of interest, and not by real interest rates as determined by overall inflation expectations. Note that the
commodity rate of interest is given by r = I – πe , where πe is the expected percentage increase in the price of that particular
commodity ; thus for each commodity there exists a separate real rate of interest for traders of that commodity.


19. A spot price is the price that is quoted to buy a commodity today. Similarly, a spot commodity is a commodity traded on the spot
market with the expectation of actual delivery, as opposed to a commodity future that is usually not delivered.


20. Again, such spot price dynamics can occur without the requirement of any change in quantities traded or in accumulated
inventories. Low interest rates are important in that they reduce the cost of holding inventories, amplifying the shifts in both
the commodity supply and demand curves and further inflating spot prices.


21. This refers to WTI crude oil annual mean price/barrel.


22. Increasing net capital inflows and net imports to the United States from China also played an important role in the deteriorating
United States’ trade balance (Morrison, 2011).


23. The euro area also has also maintained slightly more balanced trade with China compared with the United States.


24. Although the dollar depreciation partly explains the gradual increase in oil and other commodity prices since 2003, it does not
explain the sudden increase and collapse of commodity prices in 2008-2009.


25. Using a structural vector autoregressive (VAR) model, Akram (2008) estimates that a change in the real exchange rate accounts
for 50 per cent of the fluctuations in cereal prices, although, unlike the IMF (2008), inventory levels are not considered in the
estimation, which subjects the model to possible bias.


26. This figure is calculated as the net exports of maize, wheat and soybeans as a proportion of all products (by SITC code) for
which the United States has a net positive trade balance.


27. “Currency carry trade” is a class of financial operations that involves borrowing and selling in a low-yielding currency in order
to buy and lend in a high-yielding currency (UNCTAD, 2007).


28. Bloomberg Business Week, 9 December 2011, at: http://www.businessweek.com/news/2011-12-01/china-s-reserve-ratio-
cut-may-signal-economic-slowdown-deepening.html.


29. These commodity index funds take passive long futures positions in a broad set of commodities within a specified commodity
index.


30. Available at: www.cftc.gov, Regulation 1.25, published at US Printing Office, Title 17 Commodity and Securities Chapter 2,
Securities and exchange commission, Part 240, General Rules and Regulations.


31. The effective federal funds rate is the effective interest rate on overnight loans between banks, used in order to meet the
reserve requirements of the Federal Reserve – the United States central bank.


32. For a fuller discussion of this issue in the context of flexible versus fixed pricing from a structuralist position, see Taylor (1979)
and chapter 1, section 2 of this report.


33. A margin account is a brokerage account in which the broker lends the client cash to purchase financial securities and
instruments.


34. However, investments in commodity index funds stagnated in 2011, and it remains to be seen whether this will be a sustained trend.


35. Equity (stocks) is one of the principal asset classes in investment strategies. The others are fixed-income (bonds) and cash/
cash-equivalents, which are used in asset allocation planning to structure a desired risk and return profile for an investor’s
portfolio.


36. In the case of the United Kingdom’s Quantitative Easing Programme, Joyce, Tong and Woods (2011). maintain that portfolio
rebalancing effects, involving disinvestment from low-yield governments bonds and investment in equities, are potentially
large.


37. Longer term government bonds can also be placed as collateral (margin) against futures positions in the United States, although
CFTC regulations require the margin requirement to be greater than for short-term Treasury bills.


38. Bernanke made the remark at a forum sponsored by the Federal Deposit Insurance Corporation (Isidore, 2011). See the testimony
by Bernanke on the Economic Outlook and Monetary and Fiscal Policy before the United States House of Representatives
Committee on the Budget at: http://www.federalreserve.gov/ , 7 January 2011.


39. The total amount of money and liquid asset hoarding in United States non-financial corporations reached a staggering
$1.7 trillion at the end of 2010 (Federal Reserve, 2012).


cHapter II: commodity boom and bust in histoRical peRspective: new twists




66


COMMODITIES AND DEVELOPMENT REPORT


40. The OTC market involves trading of derivatives directly between two parties. There is always at least a minimal risk that one
of the parties will default (as happened in the case of Lehman Brothers). In exchange trading, all parties must place collateral
against their positions, which is held at the exchange. Margins (i.e. capital which must be held at the exchange as collateral)
continually change in accordance with the state of the market. Positions are immediately liquidated if the margin call is not
met. This reduces the risk of default (CME, 2011).


41. For further information on definitions, please see the glossary of terms.


42. Open interest is the total number of outstanding futures contracts long or short, held by market participants at the end of each
day. It measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that
contract. To determine the total open interest for any given market requires totals from buyers or sellers – not the sum of both .


43. The term wealth effects refers to an increase in spending that accompanies an increase in perceived wealth.


44. For more details, see Standard & Poor’s GSCI at: http://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg-
-usd----sp------.


45. If the market is in backwardation, it means that the futures price of contracts with later maturity dates is lower than the price
of futures in the nearby maturities. In this case, positive yields are earned in the roll period, as the price of the current futures
contract (which is sold) will be higher than the next futures contract (which is then bought). Conversely, in a contango market,
negative yields are earned in the roll period.


46. This could, however, be explained by the rollover of losses in a contango market, or simply because the five-year period is too
short to provide robust/reliable evidence of returns on commodity indices.


47. The Goldman Sachs Commodity “spot price” index is actually nearby futures prices. As nearby futures prices or “spot” prices
rise, this yields positive “spot returns” for index investors.


48. For further information on definitions, please see the glossary of terms. A long position is a market position that obligates the holder
to take delivery (i.e., to buy a commodity). This contrasts with a short position, which obligates the holder to make delivery (i.e.,
to sell a commodity). The aggregate of all long open positions is equal to the aggregate of all short open positions. For individual
traders, net long positions are total long positions minus total short positions (Mayer, 2009; Irwin and Sanders, 2010).


49. For further information on definitions, please see the glossary of terms.


50. However, this is changing, given that in 2011 there was widespread disinvestment from index funds and a growing interest in
more actively managed funds.


51. Morgan (2011) shows that there were significant gross private capital outflows to some Asian emerging economies.


52. The CFTC does not gather or release data on index trader positions in non-agricultural markets, which limits transparency and
hinders research.


53. For further information, see UNCTAD (2011).


54. For further discussions on the impact of biofuels on food prices, see Flammini (2008).


55. Here fuels include lubricants and electricity.


56. Statement by Clem Boonekamp at the UNCTAD Global Commodities Forum, 23 January 2012, available at: http://www.unctad.
info/en/Global-Commodities-Forum-2012/Presentations/.


57. Commodity index traders are institutional investors engaged in commodities futures trading strategies that seek to replicate
one of the major commodities indices by following that index’s methodology (see the glossary of terms).


58. For a comparison with Chinese import demand for other commodities, see section 3.1.3.


59. The stocks-to-use ratio reflects the excess of supply against demand. It is calculated by dividing the ending stocks of a
commodity by the total demand of that commodity and is used for measuring supply and demand of food commodities.
Historically, in the United States, soybeans have risen in price when the stocks-to-use ratio falls below 10 per cent, for wheat
below 20 per cent and for maize below 12 per cent.


60. This may also be due to land of lower quality being used for growing crops, which raises the costs of production and world
prices. However, in the absence of land productivity statistics, this cannot be empirically confirmed.


61. Explanations for the recent price commodity booms cannot be limited to an analysis of fundamentals (demand and supply)
alone, nor indeed to the role of China; there is also an increasing body of literature linking commodity prices to the recent
phenomenon of “financialization” of commodity markets (see section 3.1.1).




67


62. This imbalance arises because of short-run inelasticity of supply of commodities. Excess demand for commodities following
periods of robust growth in manufactures pushes up commodity prices and encourages investment in commodities. However,
for many commodities, such as metals, fuels and tree crops, new investments generate yields after a long gestation period
(sometimes several years), by which time manufacturing growth may have slowed (as it did in the 1980s), resulting in a
subsequent slump in commodity prices.


63. This percentage of sectors is calculated according to the Harmonized System of Trade classification introduced by the World
Customs Organization, which provides a high degree of disaggregation and a detailed analysis of product prices in different
sectors.


64. This is in line with Lewis (1954) who argued that surplus labour results in wages being held down causing export prices to
fall as productivity grows. In China, this effect is particularly magnified, given the robust productivity growth in manufactures,
combined with a large endowment of labour.


65. It should be noted that Chinese labour costs have been steadily rising and many Chinese firms are currently relocating to other
cheaper Asian manufacturing zones.


66. Xstrata is a major producer of coal (especially thermal coal), copper, nickel, primary vanadium, zinc and ferrochrome.


67. According to the GVC concept, value chains are divided among multiple firms and spread across wide geographic areas,
whether regional or international, rather than a single geographic location. The process of transforming goods and services
from production to final consumption involves linkages between the various sectors involved in that transformation process.


68. A race to the bottom is a situation where companies and countries try to compete with each other by cutting wages and living
standards for workers, and move the production of goods to places where the wages and employment rights’ are lowest.


69. AMIS aims to provide accurate, timely, reliable and comparable data on agricultural markets (i.e. with regard to production,
consumption and stocks). Thus, it would be similar to the Joint Oil Data Initiative (JODI) launched in 2002 by the G20 to curb
volatility in oil markets.


cHapter II: commodity boom and bust in histoRical peRspective: new twists




Chapter 3:


ThE DIRECT EffECTS Of
ThE 2003-2011 COMMODITy


bOOM: POVERTy AND
fOOD INSECuRITy





Chapter 3:


ThE DIRECT EffECTS Of
ThE 2003-2011 COMMODITy


bOOM: POVERTy AND
fOOD INSECuRITy


1. The direct effects of the 2003–2011 commodity boom on CDDCs .............................................................70


1.1. Introduction ...................................................................................................................................70


1.2. Rising food prices and food insecurity ...........................................................................................70


1.3. Food price volatility .......................................................................................................................75


1.4 Various aspects of food security ....................................................................................................77


1.5. Potential poverty impacts of rising and volatile food prices ...........................................................83


2. Policy response: Employing emergency food reserves to overcome food insecurity ...................................88


2.1. Emergency food reserve systems ..................................................................................................88


2.2. Key considerations for addressing food insecurity through emergency food reserves ....................94


References ...........................................................................................................................................................96




70


COMMODITIES AND DEVELOPMENT REPORT


1. ThE DIRECT EffECTS
Of ThE 2003–2011
COMMODITy bOOM ON
CDDCS


1.1. Introduction
This chapter discusses two major direct effects
of the 2003–2011 commodity boom, drawing on
recent research. The first is the effect of soaring food
prices on food security1 and trade balances, which
was found to vary depending on the composition
of imports and exports. For many CDDCs which are
net food importers, rising prices inflated their food
import bills, increased domestic food prices and
levels of poverty, and in some instances fuelled
social unrest and riots (all negative direct effects).
The second direct effect, resulting from this, was on
incomes and poverty rates.2 Although the commodity
price boom was associated with high levels of GDP
growth, the fuel and food price hikes may have
undermined efforts to reduce poverty rates and food
insecurity. The chapter concludes with a review of
a series of proposals for international and regional
cooperation and policy actions to address food
insecurity.


1.2. Rising food prices and food
insecurity


Since 2006, food prices have risen by about 70 per
cent and have become increasingly volatile (UNC-
TAD, 2012). This has caused considerable dam-
age to the health and social well-being of people
on low incomes. During the 2007–2008 food price
hikes, Bangladesh, Côte d’Ivoire, Egypt, Haiti and
Uzbekistan were among 33 developing countries
that experienced violent food riots, demonstrations


or social unrest as a result of rising food prices (To-
rero, 2011). Particularly vulnerable were pregnant
women, infants and children, with reports of rising
malnutrition, especially among the poorest house-
holds (Lin, 2008). Prices of food, especially cere-
als, again surged during 2010, which contributed
to considerable distress and civil unrest in cereal-
importing developing countries, especially in West
Asia and North Africa, where bread is a key staple
(ITC, 2011).3 Although the civil unrest in Tunisia and
Egypt was mainly prompted by high unemployment,
corruption, authoritarian governments, and poor liv-
ing conditions, high food prices was an important
catalyst in the uprisings (Zurayk, 2011).


By the first quarter of 2011, wheat, maize and
soybean prices had approached the highs of 2008
(Figure 3.1). According to the World Bank (2011),
an additional 44 million people fell below the $1.25
poverty line as a result of higher food prices from
June 2010 to February 2011. With more and more
people affected by hunger and poverty, attainment of
the Millennium Development Goals (MDGs) by 2015
is becoming increasingly unlikely.


The sharp rise in food prices during the period
2006–2008, combined with dramatic increases in
freight costs, caused expenditures on food imports
by low-income food-deficit countries (LIFDCs) to
surpass one trillion dollars in 2008, which was 26 per
cent higher than the peak reached in 2007 (see for
example, Figure 3.6).4 At the height of the food crisis
in 2008, stable or stronger currencies against the
dollar had attenuated the effect of food and fuel
price increases for some developing countries, but
for others, currency depreciation against the dollar
added to their import bills (Conceição and Mendo-
za, 2009). The increases in the import bill were not
necessarily linked to importing more food; indeed,


Although the
commodity


price boom was
associated with


high levels of
GDP growth, the


fuel and food
price hikes may


have undermined
efforts to reduce


poverty rates and
food insecurity.


The sharp rise
in food prices


during the period
2006–2008,


combined with
increased freight


rates, caused
expenditures


on food imports
in LIFDCs


to surpass
one trillion dollars


in 2008.


Figure 3.1. Food price spikes, 2001–2011 (2000=100)


50


100


150


200


250


300


350


400


01
-2


00
1


07
-2


00
1


01
-2


00
2


07
-2


00
2


01
-2


00
3


07
-2


00
3


01
-2


00
4


07
-2


00
4


01
-2


00
5


07
-2


00
5


01
-2


00
6


07
-2


00
6


01
-2


00
7


07
-2


00
7


01
-2


00
8


07
-2


00
8


01
-2


00
9


07
-2


00
9


01
-2


01
0


07
-2


01
0


01
-2


01
1


07
-2


01
1


Wheat Maize Soybeans


Pr
ic


e
in


di
ce


s
(2


00
0=


10
0)


Source: UNCTAD secretariat calculations, based on UNCTADstat.




71


cHapter III: the diRect effects of the 2003-2011 commodity boom


many CDDCs and LIFDCs curtailed their imports of
foodstuffs due to higher food prices (Figure 3.2). They
were more in line with the longer term response to
food price movements.


Most CDDCs adopted a wide range of food
management and regulation policies to try to
mitigate the direct impact of the food crisis on their
food security (Table 3.1). For example, recent cases
include trade embargoes, such as the ban on wheat


exports by a number of countries, particularly CDDCs
in 2010, and rice exports by India and Viet Nam in
2007-2008, which affected importing countries. In
some cases such bans can lead to food emergencies
in other countries (Box 3.1), depending on whether
any shortfall in imports can be replenished from
domestic production or stocks or by importing from
elsewhere on affordable terms.


Figure 3.2. Evolution of cereal imports by low-income food-deficit countries, by value and
volume, 1990/91–2008/09 (year-on-year percentage change)


-30


-20


-10


0


10


20


30


40


50


60


19
90


/9
1


19
91


/9
2


19
92


/9
3


19
93


/9
4


19
94


/9
5


19
95


/9
6


19
96


/9
7


19
97


/9
8


19
98


/9
9


19
99


/0
0


20
00


/0
1


20
01


/0
2


20
02


/0
3


20
03


/0
4


20
04


/0
5


20
05


/0
6


20
06


/0
7


20
07


/0
8


20
08


/0
9


Low-income food-deficit countries, import volumes (y/y growth rate)
Low-income food-deficit countries, import value (y/y growth rate)


Pe
r c


en
t


Source: UNCTAD secretariat calculations based on FAOstat.
Note: The data on volumes is in tons. The cereals category comprises: wheat, maize, rice, sorghum, barley,


oats, rye and millet. The LIFDCs cover 78 developing countries, including 46 LDCs.


Most CDDCs
adopted a
range of food
management and
regulation policies
to try to mitigate
the direct impact
of the food crisis
on food security.Table 3.1. Policy responses to rising food prices in CDDCs, 2008–2010


Consumption Production Management and regulation of food markets


Food assistance Producer input subsidies Lower import tariffs


Cash transfers Lower taxes Export bans/tariffs


Food for work programmes Other support Build-up of food reserves


Price subsidies Price support


Price controls Import bans or raising of tariffs


Lower taxes


Source: UNCTAD.


Box 3.1. Exploring the impact of trade and export restrictions on food prices


Export restrictions can take various forms: variable, differential and specific (ad valorem) export taxes, minimum
export prices (MEPs), quotas, government-to-government sales and export bans. These restrictive measures
fall within the purview of GATT Article XI on prohibition and restriction of exports. Although WTO rules do
not prohibit the application of export restrictions if “temporarily applied to prevent or relieve critical shortages
of foodstuffs or other products essential to the exporting contracting party,”6 as commodity prices for food
continuously rise, a number of major cereal-exporting countries have repeatedly imposed export restrictions
and bans which may have exacerbated already high prices (Box chart 1).




72


COMMODITIES AND DEVELOPMENT REPORT


During the period 2007–2010 there were at least 36 export bans, 6 ad valorem taxes, 6 quotas and 4 MEPs
imposed, some of which were introduced concurrently and others sequentially (Sharma, 2011). Rising food prices
can negatively affect poverty and food security, particularly in LDCs and net food-importing developing countries
(NFIDCs). Several studies on the food crises have noted that while export bans on their own did not initiate the
food crisis (which were often due to exogenous shocks such as droughts or poor harvests), they often amplified
the price rises, turning them into spikes (Sharma, 2011; Headey, 2011a).


In addition to contributing to global instability in food markets, export restrictions lead to trade policy responses
from both exporters and importers, which, when considered collectively, have been shown to render national
government interventions ineffective in stabilizing domestic prices (Martin and Anderson, 2010). Export restrictions
add to the cost of exogenous supply or demand shocks to food purchasers worldwide. Moreover, when several
major food-exporting countries adopt export restrictions, they further depress the terms-of-trade for food-importing
countries, especially LDCs and NFIDCs. Martin and Anderson (2012) use a global market equilibrium model to
show that changes in trade policies (particularly export restrictions and import tariff cuts) contributed significantly
to price rises in world wheat and rice of 30 per cent and 45 per cent, respectively, during the period 2006–2008.


Also, Headey (2011a), in comparing trade volumes for rice, wheat and maize against all major trade policy
developments of both importers and exporters during the 2008 food crisis, finds that short-run trade shocks provide
the most compelling explanation for the overshooting of prices of all three commodities. Moreover, assuming inelastic
demand and supply values for rice, Headey estimates that export bans by four countries (China, Egypt, India and
Viet Nam) contributed to a 61 per cent increase in the world price of rice between 2007/08 - 2009/10. The relatively
small volumes of traded rice may be one of the reasons for the observed price fluctuations (Headey, 2011a). These
results are broadly consistent with those observed in a study by Mitra and Josling (2009) of the impact of the Indian
rice export ban. While it would appear that export restrictions did not significantly contribute to the thinness of
agricultural markets, nor did they trigger the food crisis, they probably played a role in undermining confidence in the
global trading system. Developing countries (particularly the most food insecure ones) will need to retain some policy
flexibility as such restrictions may be politically necessary in response to public protests over high food prices.


100


150


200


250


300


350


400


450


500
01


-2
00


7


04
-2


00
7


07
-2


00
7


10
-2


00
7


01
-2


00
8


04
-2


00
8


07
-2


00
8


10
-2


00
8


01
-2


00
9


04
-2


00
9


07
-2


00
9


10
-2


00
9


01
-2


01
0


04
-2


01
0


07
-2


01
0


10
-2


01
0


01
-2


01
1


04
-2


01
1


07
-2


01
1


10
-2


01
1


Pr
ic


e
in


di
ce


s
(2


00
0=


10
0)


Wheat Maize Rice


India rice ban
09/10/2007


India wheat ban
02/2007


Egypt rice ban,
10/2009


Egypt rice ban
03/2008


Pakistan wheat
ban, 10/2009


Russian Federation
wheat ban, 04/2008


Russian Federation
wheat ban, 03/2011


Viet Nam rice ban
07/2007


Argentina maize
restrictions,


03/2008


Argentina wheat
restrictions, 03/2008


China maize
restrictions,
01/2008


China wheat
restrictions, 01/2008


Russian Federation wheat
and maize ban, 08/2010


Ukraine wheat
restrictions,


05/2007 & 04/2008


Ukraine wheat & maize
restrictions, 08/2010


Ukraine wheat
restrictions, 03/2011


Viet Nam and Myanmar
rice restrictions, 07/2008 Viet Nam rice restrictions,


08/2010


Cambodia rice
ban, 05/2008


India maize ban
07/2008


Kenya and Malawi
maize bans, 10/2008


Nepal rice bans, 04/2008


Box chart 1. Major food export restrictions imposed during 2007-2011


Source: UNCTAD secretariat, based on Headey (2011a) and Sharma (2011).


Box 3.1. Exploring the impact of trade and export restrictions on food prices (continued)




73


cHapter III: the diRect effects of the 2003-2011 commodity boom


Rising food prices have inevitably become a chal-
lenge for food security, especially in poor countries.
Estimates of the number of additional people pushed
into hunger as a result of the 2008 food crisis range
between 119 and 180  million (World Bank, 2010;
FAO, 2010).5 More recently, in 2011, the Horn of Af-
rica suffered one of the worst famine and food se-
curity crises observed since the 1980s, largely due
to a devastating drought which decimated local food
production.


Food emergencies tend to arise from three types of
events: (i) natural disasters, such as droughts, floods
and earthquakes; (ii) the loss of normal supplies for
economic, political or military reasons (e.g. food ex-
port bans discussed in Box 3.1); and (iii) an increase
in the prices of imported foods to a level that causes
countries to reduce their food imports. These events
have stemmed from the following three underlying
factors:


• Climate change has increased the incidence of
natural catastrophes, such as floods in Pakistan
in 2010 and erratic rainfall in much of East Af-
rica, often leading to national food emergencies.
Another example of a climate-related impact,
which caused a global price shock, was the se-
vere drought of 2007 in Australia. This resulted
in a major reduction of world wheat exports,
leading to a spike in wheat prices in 2007-2008
(Box 3.2).


• Price shocks on world markets, which were
transmitted through the trading system to virtu-


ally every country in the world. This applied most
of all to wheat, rice and maize – the world’s most
important staple foods.


• A sharp change in the long-term ratios be-
tween the prices of cereals, agricultural inputs
and export crops (with biofuels and land grabs
also playing a role). Over the past 30 years, the
prices of cereals have increased more slowly,
overall, than those of oil and mineral fertilizers,
but faster than those of poor countries’ main ex-
port crops. This makes input-dependent forms
of agriculture less profitable.


The Updated Comprehensive Framework for Ac-
tion (UCFA) of the United Nations High-level Task
Force on the Global Food Security Crisis (UN HLTF)
has advocated a twin-track7 approach to enhance
food and nutrition security and resilience to shocks,
while responding effectively to humanitarian emer-
gencies at the national level. It requires implement-
ing simultaneous short- and long-term interven-
tions.8 The UCFA contains detailed treatment of all
aspects of food (and nutrition) security, and gives
particular priority to sustainable agriculture, better
ecosystem management and gender equity. It also
mentions improved nutrition and the human rights
of those least able to enjoy their right to food as
prerequisites. Moreover, the UCFA acknowledges
the primary role of the State in tackling food in-
security, in partnership with other stakeholders,
through a wide range of sectoral policies and ac-
tivities that need to be addressed both comprehen-
sively and coherently.


The Updated
Comprehensive
Framework for
Action of the
UN HLTF has
advocated a twin-
track approach
to enhance food
and nutrition
security: (i)
meeting the
immediate food
and nutrition
needs of those
at risk; and (ii)
building longer
term resilience
by eliminating
the root causes
of hunger and
poverty.


Box 3.2. Climate change and food insecurity


Many developing countries are already off-track in meeting MDG 1,a and the potentially adverse effects of climate
change may mean that most, if not all, these countries will be unable to meet that MDG in the foreseeable future.
Current estimates suggest that global food and fuel shortages, which are expected to accompany climate
change, may have a disproportionate impact on CDDCs, particularly the oil-importing ones. Since CDDCs rely
on agriculture as a source of household income, and on the production and export of primary products as a
source of national income, increased climate variability and its effects will have a significant socio-economic
impact on their capacity to maintain current levels of food security. For example, in sub-Saharan Africa, where
over 60 per cent of households rely on agriculture for their livelihoods, heat-related plant stress is expected to
contribute to reduced yields in major crops by as much as 50 per cent in some areas (UNCTAD, 2009). In sub-
Saharan Africa, 200 million people (or a quarter of the population) are already facing water stress, and this is
likely to exacerbate existing health and sanitation problems, straining already precarious health services in many
areas (UN-DESA, 2009: xiii).


The agricultural sector (crops and livestock) accounts for 13.5  per cent of global greenhouse gas (GHG)
emissions, mostly methane and nitrous oxide (Kasterine and Vanzetti, 2010). In LDCs, agricultural GHG
emissions account for 28 per cent of emissions (UNCTAD, 2010), and about 43 per cent of their GHG emissions
emanate from land-use change and forestry. With growing demand for meat and dairy products in developing
countries, it is likely that GHG emissions from agriculture will increase (Kasterine and Vanzetti, 2010). Moreover,




74


COMMODITIES AND DEVELOPMENT REPORT


the decline in the FAO agricultural input index (which reflects the ratio between food prices and input prices)
during the period 2004-2008 suggests that farmers did not benefit from the commodity price boom. Sub-Saharan
Africa contributes the least in terms of GHG emissions, and yet it is among the most vulnerable regions to the
impacts of climate change due to multiple stresses, including a heavy reliance on rainfed agriculture, poverty, weak
institutional structures and low adaptive capacity (Couharde, Davis and Generoso, 2011).


Agricultural practices do not necessarily have to be disastrous for the environment, as potential risks can be turned
into opportunities for harnessing growth and agricultural development. The agricultural sector has the potential to
mitigate climate change mainly by increasing the carbon sequestration rate (i.e. the rate at which carbon is stored
in the soil), and, to a lesser degree, through the reduction of some GHG emissions– principally nitrous oxide and
methane (Smith et al., 2007). Across the rest of the agri-food supply chain, mitigation can be achieved through
carbon emission reductions. Some estimates suggest that around 89 per cent of potential GHG mitigation from
the agricultural sector is achievable through carbon sequestration (Barker et al., 2007). However, this depends
to a large extent (an estimated 70  per cent) on improved grazing, cropland management and agro-forestry
in developing countries, the level of the carbon price and effective policy instruments (UNFCCC, 2008; FAO,
2007). Potential additional benefits of carbon sequestration include the conservation of agricultural biodiversity
and reduced environmental degradation. Niggli et al. (2008 and 2009) see strong potential for climate change
mitigation from organic agriculture, for instance, and highlight its added benefits such as conserving agricultural
biodiversity, reducing environmental degradation and integrating farmers into high-value food chains. An UNCTAD-
UNEP study (2008) of 114 projects in Africa shows that a shift towards organic agricultural production increased
yields by 116 per cent. Similarly, the UN Special Rapporteur on the Right to Food reports that small-scale farmers
could double food production within 10 years in critical regions by using ecological methods, and calls for a
fundamental shift towards agro-ecological methods to boost food production and improve the situation of the
poorest (de Schutter, 2010).


However, reversing the potentially damaging impact of agriculture on the climate would require concerted actions
and commitments from all stakeholders, along with the necessary financing to implement climate adaptation and
mitigation programmes. The additional investment and financial flows needed for climate adaptation in developing
countries is estimated at between $28 and $67 billion annually, with a further $52–$62 billion for agriculture, water,
health, ecosystem and coastal-zone protection (UNFCCC, 2007 and 2009). These figures are likely to be much
higher if mitigation actions are not taken to prevent further global warming.


Two recent initiatives arising out of the 17th Conference of the Parties to the United Nations Framework Convention on
Climate Change (UNFCCC) in Durban, South Africa, in 2011 aimed at helping to bridge the financing gap and smooth
the transition towards sustainable agriculture in developing countries. The first initiative concerns a Green Climate
Fund, which by 2020 should provide $100 billion annually for mitigation and adaptation in developing countries. The
second initiative aims to promote environmentally sound technology transfer between developed and developing
countries through the creation of a Climate Technology Centre and Network (Cancun Accord, 2011).


There is need for a renewed political commitment to sustainable agricultural development in order to overcome
new and emerging challenges. In the context of food security and sustainable agricultural development, such
a commitment should reaffirm the “right to food” and give greater priority to sustainable intensification of food
production through increased investment in local food production, support to farmers’ organizations for developing
and sharing knowledge on ecological innovations, as well as improving access to local and global agri-food
markets and reducing waste throughout the supply chain. This will require a more transparent and open trading
system, and, where appropriate, policies that contribute to the stability of food prices and domestic markets.
In addition measures are needed to ensure access to land, water and other resources, and support for social
protection programmes (UN High-Level Task Force, 2010).


a MDG 1 aims to eradicate extreme poverty and hunger. The targets underpinning the goal seek to halve, between
1990 and 2015, the proportion of people living on less than $1 a day, and to halve the proportion of people who
suffer from hunger.


Box 3.2. Climate change and food insecurity (continued)




75


cHapter III: the diRect effects of the 2003-2011 commodity boom


1.3. food price volatility
In broad terms, volatility of food prices can be bad
for both surplus and deficit countries for three main
reasons (Panitchpakdi, 2010). First, fluctuating rev-
enues distort governments’ financial planning and
make it hard to allocate foreign exchange resources
efficiently. Second, farmers are unable to make op-
timal production decisions. Third, volatility exacer-
bates risk, and therefore deters investment as well
as the adoption of new technologies by farmers in
low-income countries, who cannot afford to take
risks.


These factors, which change the fundamentals of
supply and demand, are of particular importance to
CDDCs, but they do not necessarily all contribute to
food price volatility. An inter-agency report acknowl-
edges that “in the long term there is little or no evi-
dence that volatility in agricultural commodity prices
as measured using standard statistical measures is
increasing” (FAO et al., 2011: 6). However, it points
out that volatility has been higher in the 2000s than
during the previous two decades. Indeed, it states
that since 1990, “the implied volatility for major
crops has increased significantly… [and] the period
since 2006 has been one of extraordinary volatility”
(FAO et al., 2011: 7). This is the focus of the dis-
cussion about food price volatility and food security
which follows.


Long-term comparisons show that recent price vola-
tility is not unprecedented for individual commodi-
ties (Jacks, Rourke and Williamson, 2011; Maurice


and Davis, 2011). Figure 3.3 below presents the
coefficients of variation for various food commodi-
ties and oil (for comparison purposes).9 It shows
the long-term volatility of commodities prices using
annual constant prices for six commodities over the
period 1960–2010, and indicates that the more re-
cent price fluctuations during the period 1990–2010
are unexceptional for some commodities (Calvo-
Gonzales, Shankar and Trezzi, 2010). For instance,
the volatility of coffee prices has been similar to that
of most agricultural products over the past 50 years,
whereas petroleum and sugar prices have been the
most volatile (Maurice and Davis, 2011). However, it
should be noted that the volatility estimates below
do not take into account trends which could be im-
portant in the context of a commodity super-cycle,
as in the case of real prices of metals, for example
(Cuddington and Jerrett, 2008). More specifically,
the magnitude of the most recent upswing of food
and metal prices was above the historical average,
while the magnitude of the price rebound for oil was
similar to the historical average, but occurred more
rapidly (Baffes and Haniotis, 2010).


As discussed in chapter 2 of this report, there is
some evidence that trade in commodity-related fi-
nancial assets and instruments (such as index funds
and futures) was one of the reasons for the com-
modity price boom (Andreosso-O’Callaghan and
Zolin, 2010), and that the boom attracted non-com-
mercial traders. Their trade may have contributed to
price volatility, as their motive was not related to to
market fundamentals of supply and demand but to


The magnitude
of the most
recent upswing
of food and metal
prices was above
the historical
average, while
the magnitude of
the price rebound
for oil was similar
to the historical
average, but
occurred more
rapidly.


Figure 3.3. Coefficients of variation for selected commodities in the short and long run,
1960-1970 to 2000–2010


0.0


0.1


0.2


0.3


0.4


0.5


0.6


0.7


0.8


Coffee Crude oil Beef Sugar Rice Wheat


1960-1970 1970-1980 1980-1990 1990-2000 2000-2010


Source: Maurice and Davis (2011).
Note: The coefficient of variation (ratio) is based on annual constant dollar values (2000=100).




76


COMMODITIES AND DEVELOPMENT REPORT


realizing gains from price changes in commodity fu-
tures. Indeed, when participation of non-commercial
traders increases on both sides of the market (pro-
ducers and industrial food processors), this has the
potential to become an independent force affecting
prices. For instance, as speculators take long posi-
tions, betting on higher future spot prices, futures
prices are driven upwards and signals of higher
prices may be transmitted to the spot market in
such a way that initial expectations are confirmed
and provide feedback on further expectations (Cooke
and Robles, 2009).


While such speculation has a role to play in the func-
tioning of the market, with rising prices requiring in-
creasing liquidity, the proportion of speculators rela-
tive to commercial traders increases, so that prices
become driven increasingly by the market liquidity
that speculators provide rather than by underlying
fundamentals of supply and demand. Since change
in liquidity can be sudden and large, this tends to
increase price volatility.


Between 2002 and 2008, the number of financial
contracts for derivatives in commodities tripled (Fig-
ure 3.4). As Michel Barnier, Commissioner in charge
of EU financial reform, noted, “We are no longer talk-
ing about foodstuffs. Agricultural products are turn-
ing into financial assets.” 10


Causation remains an area of dispute, but there is
agreement that there exists a correlation between
the recent increases in commodity price volatil-
ity and the financialization of commodity markets.
A recent inter-agency report prepared for the G20


states: “Whilst analysts argue about whether finan-
cial speculation has been a major factor, most agree
that increased participation by non-commercial ac-
tors… acted to amplify short term price swings and
could have contributed to the formation of price bub-
bles” (FAO, et al., 2011: 12).


Figure 3.5 shows how an increase in non-commer-
cial traders’ positions in commodity futures markets
may have contributed to price volatility in three ma-
jor food commodities – wheat, maize and soybean.
The importance of speculation is measured by the
percentage share of non-commercial traders’ net
positions in those markets. An entry above the zero
line indicates that traders had net short positions.
The correlation between price volatility and specula-
tion is evident, as rising price volatility tends to be
preceded by an increase in net short positions. The
mechanism is that increased “shorting” of a future is
one measure of market anxiety about the return on
the investment. Given the linkages between futures
and prices of the underlying commodity, this trans-
lates into greater variation in cereal prices.


Ghosh (2010) asserts that the increased volatility of
commodity prices through financialization hindered
effective investment and planning for agricultural pro-
duction. Many producers initiated investments in, for
example over-sowing and other forms of production,
while others opted out of cultivation due to irregular
price signals resulting from information asymmetries.
These asymmetries were driven by financial market
behaviour which exacerbated volatility in agricultural
commodity markets (UNCTAD, 2009).


Causation
remains an


area of dispute,
but there is


agreement that
there exists


a correlation
between the


recent commodity
price volatility and
the financialization


of commodity
markets.


Figure 3.4. Monthly value of the continuous commodity index, 1956–2012


0


100


200


300


400


500


600


700


30
-1


95
6


30
-1


95
8


30
-1


96
0


30
-1


96
2


30
-1


96
4


30
-1


96
6


30
-1


96
8


30
-1


97
0


30
-1


97
2


30
-1


97
4


30
-1


97
6


30
-1


97
8


30
-1


98
0


30
-1


98
2


30
-1


98
4


30
-1


98
6


30
-1


98
8


30
-1


99
0


30
-1


99
2


30
-1


99
4


30
-1


99
6


30
-1


99
8


30
-2


00
0


30
-2


00
2


30
-2


00
4


30
-2


00
6


30
-2


00
8


30
-2


01
0


CC
I:


S
ep


te
m


be
r (


19
67


=1
00


)


Source: Commodity Research Bureau, at wikiposit.org (http://wikiposit.org/uid?CRB.CCI).
Note: The continuous commodity index (CCI) comprises 17 commodity futures aggregated into four


commodity subgroups, which are continuously rebalanced. Its components are equally weighted,
and are distributed evenly across the major sectors: energy 17.6  per cent, metals 23.5  per cent,
soft commodities 29.4 per cent and agriculture 29.4 per cent. The CCI indicates exposure to all four
commodity subgroups and trades on the ICE Futures Exchange.


Increased
volatility of


commodity
prices through
financialization


may have
hindered effective


investment
and planning


for agricultural
production.




77


cHapter III: the diRect effects of the 2003-2011 commodity boom


Producers and consumers have a common inter-
est in determining and addressing the causes of
any increased price volatility. However, there have
been disagreements over the permanence of any
increased volatility and the relative importance of
the causes of the recent price hikes. The picture
is clouded further since these are not the only
changes that have been taking place in global
commodity markets. For example, there has been
a substantial transformation of the membership
and governance of global value chains (GVCs). Cit-
ing a group of influential GVC studies, Nissanke
(2010) notes that “the governance structures of
primary commodity value chains have become
increasingly buyer-driven with a shift in the dis-
tribution of value skewed in favour of consuming
countries” (Nissanke, 2010: 8).11


There have been a wide range of proposals on
how to deal with price rises and volatility. The
inter-agency report, for example, calls for new
market-based mechanisms to protect produc-
ers against price volatility and other risks, and to
stabilize food import bills. It identifies a gap be-
tween normal and catastrophic risks “that can be
handled through market tools, such as insurance
and futures markets or through cooperative/mu-
tual arrangements among farmers themselves”
(FAO et al., 2011: 33). Conflicts and increasing
weather-related catastrophes often exacerbate
the challenges associated with high and volatile
prices, including an escalating need for food im-
ports, which in turn threaten national and regional
stability and undermine confidence in market-
mediated food security.


1.4 Various aspects of food
security


As discussed in the previous subsection, price
fluctuations are inherent in agricultural markets
– partly due to supply-demand dynamics and the
unpredictability of weather patterns and harvest
yields. The extent to which activity in futures
trades, including in OTC markets for agricultural
commodities, contributes to this volatility is cur-
rently hotly debated. However, there is some
agreement that it may have amplified the price
spikes and volatility experienced in commodity
markets during the most recent boom. Whatever
the cause, extreme volatility in food prices deters
producers from making the necessary invest-
ments for increasing productivity – one of the
underlying reasons for continued worldwide food
insecurity.


By definition, food security requires continuous
availability and universal access to food in adequate
quantity and quality for a healthy and productive
life. In the present context of economic openness
and globalization, food can be acquired by many
means, including domestic production, trade and
other types of transfers such as food aid. It is ar-
gued that sustainable food security must be based
on: (i) extending the analytical and programmatic
perspective beyond the narrow confines of farming
to encompass a macroeconomic perspective; and (ii)
agricultural and rural transformation (including the
provision of decent employment opportunities that
generate sustainable incomes for the rural popula-
tion) (Davis, 2004).


Figure 3.5. Non-commercial futures trading, 2002–2010: a cause of cereal price volatility?


-15


-10


-5


0


5


10


15


20


25


30


12
-2


00
2


04
-2


00
3


08
-2


00
3


12
-2


00
3


04
-2


00
4


08
-2


00
4


12
-2


00
4


04
-2


00
5


08
-2


00
5


12
-2


00
5


04
-2


00
6


08
-2


00
6


12
-2


00
6


04
-2


00
7


08
-2


00
7


12
-2


00
7


04
-2


00
8


08
-2


00
8


12
-2


00
8


04
-2


00
9


08
-2


00
9


12
-2


00
9


04
-2


01
0


08
-2


01
0


12
-2


01
0


Net short position in commodities,
non-commercial traders (% of total positions)


Wheat price volatility
Maize price volatility
Soybean price volatility


Pe
r c


en
t


Source: Bezemer and Szökol (2011).


The governance
structures
of primary
commodity
value chains
have become
increasingly
buyer-driven
with a shift in
the distribution
of value skewed
in favour of
consuming
countries.


Conflicts and
increasing
weather-related
catastrophes
often exacerbate
the challenges
associated with
high and volatile
prices.




78


COMMODITIES AND DEVELOPMENT REPORT


This subsection describes various food acquisition
channels, followed by an analysis of the evolution of ag-
ricultural productivity in CDDCs and how it has affected
food security. This is illustrated with particular reference
to LDCs, which are the most at risk of food insecurity.


1.4.1. Food acquisition channels
For most countries, domestic food production is the
principal means of ensuring food security. An indica-
tion of the importance of domestic food production
is the agricultural production instability index, which
is a measure that estimates annual fluctuations of
agricultural output in relation to its trend value in a
given country. During the period 1996–2001, the es-
timated instability index for LDCs was high, at 11.7
(UNCTAD, 2009), compared with the period 2006–
2008, when it was down to 7.6. By comparison, the
index for developing countries for the period 2006–
2009 was much lower at 6.4. Thus, LDCs’ domestic
food production has been, on average, less variable
since 1996–2001, but on average more variable
than that of other developing countries.


Given that markets are increasingly integrated, most
countries acquire some food through international
trade. The food import bill of developing countries
(including LIFDCs) in 2008 was $356 billion, 25 per
cent higher than in 2007 (Figure 3.6) and about
equal to the total net official development assistance
(ODA) receipts of developing countries in 2007 (FAO,
2008a). Even though this is a nominal increase and
developing countries as a whole grew rapidly in
2007, their rate of economic growth (about 8  per
cent in 2007 in real terms in purchasing power
parity) was far lower than the increase in their food
bill. For LDCs as a whole, their food import bill rose
from $7 billion in 1995 to $29 billion in 2010, and


as a share of GDP it peaked at 5.8 per cent in 2008
(FAO, 2011a).


Throughout the 1970s to the early 2000s there have
regularly been major food import surges to LDCs
(UNCTAD, 2006). And these have been increasing
over time, largely owing to the inability of domes-
tic producers (especially in African LDCs) to com-
pete with cheaper imported food (UNCTAD, 2006).12
Since 2003, LDCs’ food trade balance has steadily
declined because of soaring food prices (figure 3.7),
resulting in growing trade deficits. As illustrated in
box 3.3 (section 1.5 below), net food and fuel import-
ers, on average, witnessed a deterioration in their
terms of trade during the period 2002–2008.


For a set of 33 net food-importing countries (which
are eligible for IMF funding through the Poverty Re-
duction and Growth Facility and for which data are
available) the adverse balance-of-payments impact of
the increase in food prices during January 2007 until
April 2008 was estimated at $2.3 billion, an average
of 0.5 per cent of the average annual GDP for 2007.


During the period 2005–2007, 35 LDCs were net food
importers and 15 of them can be considered net food
exporters. Major food-importing LDCs typically include
oil-producing countries and those where conflict has
hindered domestic production of food and made them
more vulnerable to higher food prices. Similarly, small
island developing States (such as Cape Verde and
Maldives) tend to be major food importers, as their
economies rely mainly on their services sector (e.g.
tourism), rather than on food production. Food aid ac-
counted for an increasing share of total food imports in
LDCs, rising from 6 per cent in 2006–2008 to 8 per cent
in 2009 (figure 3.8). In 2008, food imports accounted
for 12 per cent of food consumption in African LDCs,
7 per cent in Asian LDCs and 20 per cent in island LDCs.


The food import
bill of developing


countries in 2008
was $356 billion,


25 per cent
higher than in


2007 and about
equal to the total


net ODA receipts.


LDCs’ food
import bill rose
from $7 billion


in 1995 to
$29 billion in


2010, peaking
at 5.8  per cent
of their GDP in


2008.


Figure 3.6. Food import bills of developed and developing countries and LIFDCs, 2007–2011
($ billion)


0


200


400


600


800


1 000


1 200


1 400


0


100


200


300


400


500


600


700


800


900


2007 2008 2010 2011


$
bi


lli
on


World (right scale) Developed Developing LIFDC


Source: FAO (2008b and 2011a).




79


cHapter III: the diRect effects of the 2003-2011 commodity boom


Figure 3.7. LDCs’ food trade balance, 1995–2009


Figure 3.8. Indicators of food security in LDCs, selected yearsa


0


50


100


150


200


250


-18 000


-16 000


-14 000


-12 000


-10 000


-8 000


-6 000


-4 000


-2 000


0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


LDCs' food balance All food price index, right axis


Pr
ic


ei
nd


ex
(2


00
0=


10
0)


Al
l f


oo
dt


ra
de


b
al


an
ce


($
th


ou
sa


nd
)


0


5


10


15


20


25


30


35


Africa Asia Islands LDCs


Pe
r c


en
t


A. Percentage of undernourished


2000-2002 2005-2007


0


2


4


6


8


10


12


14


16


Africa Asia Islands LDCs


C. Percentage of food aid in total food
imports


2006-2008 2009


Pe
r c


en
t


1 900


2 000


2 100


2 200


2 300


2 400


2 500


2 600


Africa Asia Islands LDCs


Ca
lo


rie
s


pe
r c


ap
ita


p
er


d
ay




B. Per capita food consumption
(calories/day)


2000-2002 2006-2008


0


5


10


15


20


25


30


Africa Asia Islands LDCs


Pe
r c


en
t


D. Percentage of food imports in total
merchandise imports


2008 2010


Source: UNCTAD secretariat calculations, based on UNCTADstat (accessed November 2011).


Source: UNCTAD secretariat calculations, based on data from FAO: http://www.fao.org/economic/ess/ess-fs/
fs-data/ess-fadata/en/ (Dietary Energy, Protein and Fat); FAO: http://www.fao.org/fileadmin/templates/
ess/documents/food_security_statistics/Food_Consumption_Population_Growth_en.xls; OECD,
Creditor Reporting System database: http://stats.oecd.org/Index.aspx?DataSetCode=ODA_SECTOR;
and UNCTADstat.


a Depending on availability of data for each year.


Food aid as a
share of total
food imports
in LDCs, rose
from 6 per cent
in 2006–2008
to 8 per cent in
2009.




80


COMMODITIES AND DEVELOPMENT REPORT


For the 35 food-importing LDCs, rising food prices
increase import bills, which negatively affect their
trade and current accounts. For the 15 food-ex-
porting LDCs, there have been limited benefits from
higher prices due to inadequate access to land, weak
productive capacities and higher production costs
linked to higher oil prices. For LDCs as a whole, com-
mercial food imports as a share of total merchandise
imports rose by 2 percentage points between 2008
and 2010. LDC food consumption measured as calo-
ries per capita/day, increased on average by 4 per
cent between 2000–2002 and 2006–2008 (Figure
3.8). The average share of the undernourished in the
total LDC population, although declining since 1990,
is still high at 23 per cent.


During the period 2005–2007, undernourishment
declined in LDCs (Figure 3.8A), and per capita food
consumption increased (Figure 3.8B), despite higher
food prices. This may be due to substitution effects of
expenditure on household food instead of non-food,
as well as rising food aid and imports (Figure 3.8 C
and D), possibly with higher nutrient content.13 Even
in a context of rapid GDP growth, maintaining food
consumption levels in LDCs was achieved but with
rising food import bills (UNCTAD, 2011a).


Food is also acquired through other types of trans-
fers, such as food aid, and more generally, by food
production, for which ODA has been critical. How-
ever, the share of ODA for agriculture in developing
countries has been falling, from 13 per cent in 1983
to 3 per cent in 2006 (Figure 3.9). Since then, inter-
national efforts (e.g. the G8 L’Aquila commitments)
have been made to increase the level of investment


in agriculture in developing countries as a result
of increasing price volatility and the food crisis of
2008. Unfortunately, however, according to the
Deauville Accountability Report14 only 22 per cent of
the $20 billion pledged at L’Aquila for a three-year
period had actually been spent more than half-way
through that period. Although the share of total ODA
to agriculture had risen from 3 per cent in 2006 to
5 per cent by 2009, it is still insufficient; there needs
to be a concerted effort by the international com-
munity to increase aid to CDDC agriculture and thus
support developing-country efforts to enhance their
food security.


1.4.2. Agricultural productivity and food
security


In recent decades the contribution of agriculture to
global growth has been falling. Despite the impor-
tance of agriculture for employment in the CDDCs,
growth of labour productivity is low compared with
that in manufactures and services, contributing only
very little to real GDP growth. LDCs, in particular,
have lagged behind, their agricultural labour pro-
ductivity being just 46 per cent of that of other de-
veloping countries and below 1 per cent of that of
developed countries (UNCTAD, 2010). Moreover, the
agricultural productivity gap between most CDDCs,
especially in Africa, and the world average has been
increasing since 1961 (figure 3.10). Agricultural pro-
ductivity and its potential vary considerably among
CDDCs – the result of a combination of natural and
locational factors that determine crop suitability and
accessibility of markets. However, climate change


The average
share of the


undernourished
in the total LDC


population,
although declining
since 1990, is still


high at 23 per
cent.


The share of ODA
for agriculture
in developing
countries has


been falling, from
13 per cent in
1983 to 3 per
cent in 2006.


Figure 3.9. Share and level of official development assistance to developing countries, 1975–2009


0


2


4


6


8


10


12


14


0


1


2


3


4


5


6


19
75


19
77


19
79


19
81


19
83


19
85


19
87


19
89


19
91


19
93


19
95


19
97


19
99


20
01


20
03


20
05


20
07


20
09


$
bi


lli
on




ODA to agriculture (Current $ billion) Share of agriculture in total ODA, right axis


Pe
r c


en
t


Source: OECD.Stat, DAC database (accessed on 21 June 2011).




81


cHapter III: the diRect effects of the 2003-2011 commodity boom


also has potentially significant impacts on CDDC
agriculture and food security (Box 3.2). The adverse
effects of global warming on agricultural production
and consequently on food supplies, result in higher
food prices for consumers. On the supply side, the
effects on producers vary according to farm size,
location and agro-ecology, as well as through op-
portunities in the burgeoning bio-energy markets.
With the agricultural frontier expanding only margin-
ally (mostly in sub-Saharan Africa), the availability
of arable land per person may continue to decline.
Additionally, shrinking farm sizes pose problems of
poverty and threaten food security – not to mention
distributional issues – which are likely to be aggra-
vated by the potentially disruptive effects of climate
change on land productivity, especially in marginal
areas (Valensisi and Davis, 2011). However, these ef-
fects could be averted if there is the political will to
implement climate mitigation and adaptation meas-
ures (Box 3.2).


The adoption of advanced technologies, accompa-
nied by increased productivity in different parts of
the world, may explain in large part the regional dif-
ferences in growth and poverty reduction in recent
decades. Agricultural performance in Asia between
1961 and 2001 was positive, with cereal production
outstripping population growth, and it was achieved
with a modest expansion of cultivated land from
1 billion ha to 1.4 billion ha. This suggests that the
increase in productivity in that region has largely
been due to the application of technological innova-
tions (e.g. the Green Revolution). During the same
period, the production of cereals in sub-Saharan
Africa did not keep pace with population growth.


Between 1961 and 2001 increases in cereal produc-
tivity in that region have been small, rising from 0.8
to 1.2 tonnes per ha, mainly due to the deployment
of more labour and the expansion of cultivated land
rather than to technological innovations (UNCTAD,
2009).


Policymakers in CDDCs are therefore confronted
with a need to increase agricultural productivity
on the one hand, but also to foster the creation of
greater income opportunities through higher value-
added agriculture and non-farming rural activities.
The development of agriculture for enhancing food
security and reducing poverty requires extending the
analytical and programmatic perspective beyond the
narrow confines of farming; it needs to encompass
a macroeconomic perspective that emphasizes the
importance of generating a larger agricultural sur-
plus. This requires a growth in agricultural labour
productivity that exceeds the growth of labour’s
own consumption requirements by an increasingly
larger margin. As the World Bank (2008a: 35) notes,
“In countries, or regions within countries, with poor
agroecological conditions, agriculture’s contribu-
tions to growth will be limited. Even so, agriculture is
still likely to play an important complementary role in
reducing poverty and improving food security.”


The lack of agricultural surplus in many CDDCs may
constrain non-agricultural growth from the demand
side (demand deficiency), but also from the sup-
ply side. On the supply side, it has the potential to
make the system prone to food-price inflation, which
would: (a) erode the real wages of non-agricultural
workers and of farmers, since the most of them are


Figure 3.10. Cereal yields: developing countries versus world average, 1961–2009(Kilograms/hectare)


500


1 000


1 500


2 000


2 500


3 000


3 500


4 000
19


61


19
63


19
65


19
67


19
69


19
71


19
73


19
75


19
77


19
79


19
81


19
83


19
85


19
87


19
89


19
91


19
93


19
95


19
97


19
99


20
01


20
03


20
05


20
07


20
09


Ki
lo


gr
am


s
pe


r h
ec


ta
re




World Net food-importing developing countries LDCs Africa


Since 1961, widening
gap between the world


average and developing
countries and LDCs


Source: UNCTAD secretariat calculations, based on FAOstat (accessed 21 June 2011).


Sustainable food
security requires
an analytical and
programmatic
perspective
beyond farming
to encompass a
macroeconomic
perspective
and agricultural
and rural
transformation,
including
productivity
improvements.




82


COMMODITIES AND DEVELOPMENT REPORT


net food purchasers, and consequently reduce their
consumption; (b) erode industrial profits, and hence
investment; and (c) possibly lead to a decline of ex-
ports, due to loss of cost competitiveness.


Another hindrance to agricultural development since
the 1980s is that there has been reduced domestic
government support for agriculture in most LDCs,
largely as a result of structural adjustment pro-
grammes (SAPs) initiated at that time. Agricultural
marketing systems in most African developing coun-
tries prior to the 1980s were characterized by perva-
sive government interventions which were intended
to minimize the risk of famine and food shortages
as well as to assure foreign exchange earnings and
tax revenues from strategic agricultural export com-
modities (Akiyama et al., 2001). In the mid-1980s,
when LDCs faced severe fiscal crises, donors sought
to improve efficiency of resource allocation by pro-
moting privatization, liberalization and agricultural
marketing reforms as part of SAPs.15 As a result, the
involvement of the State in input and output market-
ing, as well as in setting domestic producer prices for
various commodities, was either abolished or scaled
back substantially. There is little historical evidence
of sustained agricultural productivity growth occur-
ring in countries without a reasonable level of effec-
tive government intervention in agricultural markets,
such as through price stabilization, establishing rural
banks or marketing boards (Bezemer and Headey,
2008). The Asian growth experience during the
1970s to 1980s highlights the potentially positive
role developmental states can play in promoting
successful agricultural development through the
provision of public goods and market coordination
processes (see chapter 1; Stiglitz, 1997; UNCTAD,
2009).16 However, much of this was effectively out-
lawed under the SAPs of the 1980s and subsequent


WTO rules17 in the 1990s (Bezemer and Headey,
2008; DiCaprio and Gallagher, 2006).


However, it should also be noted that many sub-
Saharan African policymakers neglected the agri-
culture sector in terms of investing in research and
development (R&D), and through the introduction
of high taxation policies targeting the sector. The
importance of government investment in agricul-
ture has been recognized by the African Union (AU)
and the New Partnership for Africa’s Development
(NEPAD). For example, under the AU Maputo com-
mitment, governments of sub-Saharan African coun-
tries have promised to channel, on average, 10 per
cent of public spending to agriculture and rural de-
velopment. However, the figure is currently less than
half that amount, and the sector is still taxed at rela-
tively high levels.


The LDCs that were encouraged to liberalize trade
too quickly have struggled, many of them under the
pressure of low-priced, subsidized food exports from
developed countries. Agricultural subsidies in devel-
oped countries may have influenced the rise in LDC
food imports since the 1980s and undermined LDCs’
food production for both export and the domestic
markets. As a result, this may also have reduced
farmers’ abilities to generate the supplies needed in
response to the food crises. Since 1987, the agricul-
tural trade balance in LDCs has steadily worsened
as they have become major net importers of agricul-
tural products (figure 3.11). Their gross imports of
agricultural products rose by 96 per cent during the
period 1987–2009.


Many CDDC farmers face a “double disconnect”
– from input and product markets and from frag-
mented regional markets. In order to overcome this
problem, it will be necessary to develop strategic


The agricultural
sector needs


structural
transformation in


order to ensure
long-term food
security. Public


investments have
a crucial role
to play in this


process.


Since 1987, the
LDC agricultural


trade balance
has steadily
worsened,


as they have
become net
importers of
agricultural
products.


Figure 3.11. Agricultural trade balance of LDCs, 1970–2009 ($ billion)


0


5


10


15


20


25


30


19
70


19
73


19
76


19
79


19
82


19
85


19
88


19
91


19
94


19
97


20
00


20
03


20
06


20
09


Tr
ad


e
ba


la
nc


e
($


b
ill


io
n)


Imports Exports


Source: UNCTAD secretariat calculations, based on FAOstat (accessed January 2012).




83


cHapter III: the diRect effects of the 2003-2011 commodity boom


agricultural commodity value chains that have the
potential for making a positive impact on food secu-
rity (e.g. in Africa this might include, maize, rice and
sorghum). This will require maximizing intraregional
complementarities and trade potential in the follow-
ing ways:


• Development of a common agricultural market
in various regional groupings, such as the Eco-
nomic Community of West African States (ECO-
WAS), the Southern African Development Com-
munity (SADC), the Association of Southeast
Asian Nations (ASEAN) and the Central American
Common Market (CACM);


• Encouraging the private sector to participate in
agricultural markets through the development
of agri-processing and agribusiness in order
to create greater value- added activities in
agriculture, especially in Africa.


• For purposes of R&D, regional centres of
excellence to enhance potential economies of
scale need to be established.


Some of these issues are addressed in more detail
later in this chapter.


1.5. Potential poverty impacts
of rising and volatile food
prices


The risk of rising food prices leading to an increase
in poverty is particularly high in developing coun-
tries, because the share of consumer spending on
food in these countries is, on average, much larger


than in developed countries (Figure 3.12). For ex-
ample, the average share of consumer income
spent on food is 9.8  per cent in the United States
compared with 65.5  per cent in Bangladesh. LDC
households, where food accounts for 40–80  per
cent of consumer spending, have probably suffered
the most from domestic food price inflation. Rising
food prices therefore have a disproportionately ad-
verse impact on lower income countries (OECD-FAO,
2008). Whereas people in developed countries can
easily afford to spend more on food, as it constitutes
a relatively small share of their monthly expenditure,
poorer CDDC populations are routinely vulnerable to
food insecurity and other shocks.


Beyond the immediate humanitarian dimensions,
high food prices are detrimental to development:
they contribute to macroeconomic instability in de-
veloping and emerging economies, creating infla-
tionary pressures as real incomes are eroded (UNC-
TAD, 2008). In particular, developing countries where
food constitutes a large share of imports may be
subject to adverse terms-of-trade shocks and high
current-account deficits (Lin, 2008). This can trig-
ger a balance-of-payments crisis and depreciation
of the domestic currency which further aggravates
inflationary pressures and food shortages.


Determining the impact of recent food price volatility
on food security and poverty indicators in the CD-
DCs is problematic because of the varied conditions
in the different countries. Net food exporters ben-
efited from improved terms of trade, although some
of them missed out on this opportunity by banning
exports to protect consumers. Net food importers,


Figure 3.12. Share of consumer expenditure on food, selected countries, 2008


0 10 20 30 40 50 60 70


South Africa
Botswana
Indonesia


China
Peru
India


Guatemala
Jordan


Senegal
Pakistan


Egypt
Haiti


Kenya
Malawi


Sri Lanka
Bangladesh


Developing countries
United States


Germany
Switzerland


United Kingdom
Sweden
France
Greece
Japan
Spain


Developed countries


Per cent


Source: OECD-FAO (2008), at: http://www.fao.org/es/esc/common/ecg/550/en/AgOut2017E.pdf.


As most LDCs
are net importers
of cereals, during
the boom they
were hit hard
by rising prices,
as were the
majority of LDC
households,
where food
accounts for
40-80 per cent
of consumer
spending.




84


COMMODITIES AND DEVELOPMENT REPORT


however, struggled to meet domestic demand. Given
that many CDDCs are net importers of cereals, they
were hit hard by rising prices, as were the majority
of CDDC households which are net food purchasers.


Both governments and donors are concerned about
how best to address the recent high food prices
that are threatening to undermine some of the
gains that CDDCs have made in terms of lowering
their levels of poverty and malnutrition in recent
years (UN High-Level Task Force, 2010). Poverty is
both quantifiable and highly correlated with hunger
and malnourishment (von Braun, 2008). The spike
in food prices between 2005 and the first half of
2008 had both immediate (first-order) and indirect
(second-order) impacts on incomes and poverty. The
immediate negative impacts were that households
were obliged to spend a larger proportion of their
budgets on food, which decreases real incomes. On
the other hand, it had a positive first-order effect
on farmers, who received higher prices for their
output. But since farmers are also consumers, and
since many of them are poor and spent a large
proportion of their household income on food, much
of these gains were undermined by the negative
consumption effect. A second-order effect may
operate when higher food prices trigger a supply
response, shifting production factors and leading to
an increase in wages and employment, as well as
income growth, in the food and agricultural sectors
(Balcombe et al., 2005).


It is important to use domestic prices in any assess-
ment of the impact on incomes and poverty. Since
2003, some CDDC governments have introduced
food subsidy policies, which dampen the effect of
price fluctuations in international markets. Other
causes of incomplete pass-through of international
prices to domestic markets include variations in
the degree of food processing, size/volume of non-
traded food items in domestic consumption baskets,
variations in transport and storage costs as well as
variations in food value chain profit margins (Ghosh,
2010). De Hoyos and Medvedev (2011) provide the
most complete assessment of the incomplete pass-
through of international prices to domestic markets
to date. Using domestic food consumer price index
(CPI) data of the ILO, they compare these to changes
in a manufacturing unit value index for a sample
ranging from 63–93 per cent of the population of the
developing world. They find that relative to the lat-
ter index, the domestic food CPI in a sample of 58
developing countries increased by 5.6 per cent, on
average, over the period January 2005–December
2007. The extent of incomplete pass-through is clear
in comparison with the international food CPI relative
to the manufacturing unit value index, which rose by
31 per cent (the change in the international food CPI
itself was 74 per cent).


Urban dwellers are mainly net food purchasers, and
are therefore fully exposed to the immediate nega-
tive consumption effect of rising food prices. Based
on a sample covering 63 per cent of the developing-
country population (but excluding China), De Hoyos
and Medvedev (2011) estimated that on average the
urban poor spent 59 per cent of their budget on food.


There are large regional variations in the effects of
the changes in relative food prices on poverty (table
3.2). Between 2005 and 2007, the weighted aver-
age increase in the relative food CPI for urban areas
in developing countries was 4.1 per cent, with food
prices increasing at slower rates in Latin America
and the Caribbean as well as in Eastern Europe and
Central Asia, whereas in East Asia and the Pacific and
in West Asia and North Africa they increased more
rapidly (de Hoyos and Medvedev, 2011). East Asia ex-
perienced the greatest increase in poverty (measured
by a poverty line of $1.25 per day in 2005 constant
PPP-corrected dollars) owing to the large share of
food items in poor urban households’ budgets and
soaring food prices. The countries of West Asia and
North Africa also witnessed a relatively large increase
in urban poverty caused by a sharp rise of 12.5 per
cent in the relative prices of food in these subregions.
The estimated average cumulative shock to urban
dwellers’ domestic food prices of 4.1 per cent over the
period January 2005–December 2007 resulted in a
2.9 per cent increase in the urban poverty headcount
ratio (rising from 15.2 to 18.1  per cent). This is an
increase of 68.8  million people, and most of them
(51.1 million) were in East Asia and the Pacific. The
severity of poverty, measured by the headcount ratio,
also increased the most in East Asia and the Pacific,
from 13.3 per cent to 19.6 per cent, compared with
the developing-country average rise of 2.9 per cent
to 18.0 per cent. In areas where poverty has already
been quite high – such as South Asia and sub-Saharan
Africa, with poverty gaps of 8.1 per cent and 13 per
cent respectively – the urban food price impact has
been relatively small, with the poverty gap increasing
by only 0.7 and 0.8 per cent respectively in the two
regions.


An evaluation of the poverty effect on rural popula-
tions requires the use of imputed agricultural self-
employed shares, which are hard to measure accu-
rately. Rural populations are both more numerous in
developing countries and more likely to be poor (Ta-
ble 3.2). For the whole sample, covering both urban
and rural households, the 2005–2007 price shock
added 2.4 per cent to the poverty headcount ratio
in the total sample (from 29  per cent to 31.4  per
cent). The poverty gap increased from 8.2 per cent
to 9 per cent, compared with a change of 4.3 per
cent to 5.2 per cent in urban areas. Altogether, the
food price shock increased the number of people in
poverty by 155.6 million (De Hoyos and Medvedev,




85


cHapter III: the diRect effects of the 2003-2011 commodity boom


Table 3.2. Effects on poverty of the changes in relative food prices, Jan. 2005 – Dec. 2007.
Initial (circa 2005) Change


Region Shock to food prices (%)


Food share
among the
poor (% of


total income)


Poverty
headcount


ratio
Poverty gap


Poverty
headcount


ratio
(percentage


points)


Poverty gap
(percentage


points)


Number of
poor (million)


Urban households only


East Asia and the Pacific 13.81 67.46 13.28 2.69 6.34 1.86 51.1


Eastern Europe and Central Asia -0.49 56.87 1.31 0.22 0.04 0.01 0.1


Latin America and the Caribbean 1.64 40.36 3.73 1.39 0.12 0.02 0.5


West Asia and North Africa 12.54 57.03 2.71 0.48 2.49 0.72 4.4


South Asia 4.84 61.86 32.27 8.07 1.89 0.66 8.2


Sub-Saharan Africa 4.91 52.75 34.09 12.97 1.65 0.75 4.6


Developing world 4.1 58.76 15.17 4.29 2.86 0.89 68.8


Urban and rural households


East Asia and the Pacific 12.98 70.65 24.77 5.59 5.98 1.97 113.5


Eastern Europe and Central Asia -0.39 60.42 1.94 0.34 0.04 0.01 0.2


Latin America and the Caribbean 3.09 44.1 7.97 3.23 0.19 0.07 1.1


West Asia and North Africa 19.79 61.7 9.61 2.14 2.41 0.8 7.4


South Asia 4.96 64.9 40.6 9.81 1.84 0.65 27.7


Sub-Saharan Africa 8.14 64.35 48.32 19.69 0.74 0.36 5.8


Developing world 5.6 64.51 28.72 8.18 2.38 0.75 155.6


Source: de Hoyos and Medvedev, 2011, and de Hoyos and Lessem, 2008.
Notes: (i) The regional changes in food prices are weighted averages of the cumulative increase in domestic food CPIs relative to non-food


CPI, observed between January 2005 and December 2007;
(ii) the poverty line is set at US$1.25 (2005, PPP) per day;


(iii) to compute the increase in the number of poor, the regional change in headcount was applied to all countries in the region;
(iv) de Hoyos and Medvedev define East Asia as Jordan, Morocco and Yemen and excludes China and the Middle East includes only


Jordan, Morocco and Yemen.


2011). In sum, the negative first-order consumption
effects clearly outweigh any positive income effects.


In order to examine the second-order effects,
namely whether higher food prices triggered
a supply response, thereby shifting production
factors which resulted in increased wages and
employment, de Hoyos and Medvedev (2011)
simulate a computable general equilibrium model.
The total effect is moderated when taking into
account the supply response, with poverty rising
by only 32 million people compared with a baseline
scenario, which increases the poverty headcount
ratio from 15.8 per cent to 16.4 per cent. Most of
this is due to an increase in urban poverty; poverty
among farmers remains virtually unchanged due to
offsetting income and consumption effects. It should
be noted that the computable general equilibrium
simulation relies on many assumptions, including
imputed agricultural self-employment and rural
income shares. In any case, the main conclusion
from this exercise is that the ability of developing
countries to respond to increased food prices by


expanding production has been insufficient to offset
the negative price effects. This is because the po-
tential benefits of higher prices did not accrue to
producers in many CDDCs due to higher prices of
major agricultural inputs such as fertilizers, seeds
and energy (UNCTAD, 2008). Furthermore, export
taxes and other restrictions limited the transmission
of international prices to domestic markets, which
burdened producers with higher costs and stagnant
output prices. In addition, producer proximity to mar-
kets (often constrained by poor infrastructure) and
the structure of the market (i.e. the role of traders
and processors who may have captured the bulk of
price gains) may have contributed to the reduced
supply response from CDDC producers.


Risk analyses conducted by the World Food Pro-
gramme (WFP) in a number of countries during the
period 2007–2008 show that the impact of food
price hikes on household food security and pov-
erty was significant (Dawe, 2008). The World Bank
(2008b) estimates that wheat prices in Yemen dou-
bled during 2007-2008 reversing all gains in poverty


The potential
benefits of the
increased food
prices have
not accrued to
producers in
many CDDCs,
due to higher
prices of major
agricultural
inputs.




86


COMMODITIES AND DEVELOPMENT REPORT


reduction achieved between 1998 and 2005. Simi-
larly, Ivanic and Martin (2008) analysed the impact of
higher prices of key staple foods on poverty in nine
low- income countries,19 and found that in six of the
countries the increase in food prices between 2005
and 2007 increased poverty by 3 percentage points.


FAO (2008d) simulations using household data
from Malawi show that a 10  per cent increase in
food prices resulted in a 1.2 per cent income loss
for the poorest quintile in rural areas and a 2.6 per
cent income loss for the poorest quintile in urban ar-
eas. According to this analysis, only the richest rural
quintile gained from an increase in food prices. The
Asian Development Bank (2008) found that for every
10 per cent increase in food prices, about 2.3 mil-
lion Filipinos fell into poverty. In addition, estimates
of the total effect of changes in price on poverty (the
price elasticity of poverty)20 by commodity in the


Philippines suggested that a 10 per cent increase in
non-food prices (e.g. fuel and utility bills) would drive
an additional 1.7  million people into poverty (ADB,
2008). The study also suggested that the decline in
the standard of living due to food price increases
was greatest for the poorest communities.


The impact of rising food prices on poor net food-
importing countries is a particular concern. A study of
the 2007-2008 price spikes by Clay, Keats and Lanser
(2011), which includes case studies of rice in Bangla-
desh, maize in Malawi and cereals in the Sahel, finds
some observable domestic market sensitivity to glob-
al price volatility in all these countries. This had par-
ticular implications in terms of market instability. The
price rises also intensified food insecurity amongst
poor urban and rural consumers and farming house-
holds that were only partially meeting their own staple
food requirements and were seasonally in deficit.


Box 3.3. How vulnerable to price spikes are developing countries that are highly dependent on food and fuel imports?


As noted in chapter 2, while it is clear that most fuel and food exporting CDDCs benefited from the growing
demand for primary exports and rising prices during the period 2001–2008, the soaring prices of food, and
particularly energy, have tended to moderate the potential positive impact of the boom in terms of raising
living standards and alleviating poverty. During the mid-2008–2009 economic downturn, the fall in food and
fuel prices helped to attenuate the impact of the financial crisis on net food- and fuel- importing developing
countries. Developing countries’ combined food and oil import bills as a percentage of merchandise exports,
increased on average by 7 percentage points during the period 2002–2008. If food and fuel are considered
independently of each other as a share in merchandise exports, it is clear that higher fuel prices have had the
greatest inflationary impact, and this has grown since 2002 (Box chart 2). This suggests that higher prices of fuel
imports may also have had a greater impact on the incidence of poverty in low- to middle-income developing
countries, as the share of food imports in merchandise exports fell in most of these countries.


0 10 20 30 40 50


Developing economies: Oceania
Western Asia


Southern Asia
South-Eastern Asia


Eastern Asia
Developing economies: Asia


South America
Central America


Caribbean
Developing economies: America


Western Africa
Southern Africa
Northern Africa


Middle Africa
Eastern Africa


Developing economies: Africa
Developing economies


A. Food imports


2008
2002


Per cent


Box chart 2. Regional food and fuel imports as a percentage of total merchandise exports,
2002 and 2008


Source: UNCTAD secretariat calculations, based on UNCTADstat.




87


cHapter III: the diRect effects of the 2003-2011 commodity boom


For 70 per cent of the LDCs, the share of food and fuel imports as a percentage of merchandise exports was
over 50 per cent in 2008. Moreover in 20 LDCs, the combined share of food and fuel imports as a percentage of
merchandise exports exceeds 100 per cent. It should also be noted, that the fuel import costs do not fully reflect
the cost of fuels in services imports (such as international transport by air or sea). Therefore, with the exception
of the major oil exporters, it is clear that the boom in key commodity prices has placed tremendous pressure on
most LDC economies.


Box chart 3 confirms this observation: it shows that countries with higher shares of food and fuel in total merchandise
imports witnessed, on average, a sharper deterioration in their terms of trade during the period 2002–2008. Due to
the fast rising food and fuel import prices relative to other commodity prices, net importers of these commodities
faced higher import bills and a terms-of-trade shock. Net oil exporters benefited greatly from strongly rising oil
prices during the commodity boom period of 2002–2008.


Box 3.3. How vulnerable to price spikes are developing countries that are highly dependent on food
and fuel imports? (continued)


0 50 100 150 200 250 300


Developing economies: Oceania
Western Asia


Southern Asia
South-Eastern Asia


Eastern Asia
Developing economies: Asia


South America
Central America


Caribbean
Developing economies: America


Western Africa
Southern Africa
Northern Africa


Middle Africa
Eastern Africa


Developing economies: Africa
Developing economies


B. Fuel imports


2008
2002


Per cent


y = 0.1647x + 4.3945
R² = 0.5771


0


5


10


15


20


25


0 10 20 30 40 50 60 70 80


Pe
rc


en
ta


ge
c


ha
ng


e
in


U
ni


t v
al


ue
o


f i
m


po
rt


s,
20


02
-2


00
8


Share of food and fuels in total merchandise imports, 2002-2008 (Per cent)
Other developing countries LDCs Linear (Other developing countries)


Box chart 2. Regional food and fuel imports as a percentage of total merchandise exports,
2002 and 2008


Source: UNCTAD secretariat calculations, based on UNCTADstat.


Source: UNCTAD secretariat calculations, based on UNCTADstat.


Box chart 3. Sensitivity of developing countries to food and fuel imports, 2002–2008




88


COMMODITIES AND DEVELOPMENT REPORT


As Box chart 4 further illustrates, for 19 developing countries, the main gains from the recent commodity boom have
been concentrated among oil exporters, while resource- and food-poor oil-importing countries have experienced
losses. It shows that 7 countries experienced positive terms-of-trade effects and recorded gains in excess of
8 per cent of GDP. The largest negative effects were smaller in scale, generally less than 6 per cent of GDP, and
particularly impacted the small island States.


-10 -5 0 5 10 15 20


Angola
Oman


Azerbaijan
Nigeria
Yemen


Venezuela, Bolivarian Rep. of
Algeria


Honduras
Nicaragua


Fiji
St. Lucia


Kenya
Jordan


Lebanon
Dominica


St. Vincent and the Grenadines
Cape Verde


Rep. of Moldova
Seychelles


Per cent


Source: World Bank (2012), Global Commodity Markets, at: http://go.worldbank.org/0BOJW9B7O0.


Box chart 4. Changes in terms of trade as a percentage of GDP for selected developing
countries, 2010


In the long term, the impact of the higher food prices
on poverty partly depends on how overall growth in
CDDCs responds to increased wealth accumulation
and investment by net food-selling rural households.
The impact of price volatility on poverty and food in-
security, especially for net food-importing developing
countries could be quite negative. The higher food
prices associated with the recent food crisis have
not only caused a setback for poverty reduction, but
also, the associated income losses may have re-
sulted in greater undernourishment, thereby further
reducing the likelihood of meeting other MDGs.


The issues of protecting vulnerable groups from food
insecurity and the role of governments have come
to the fore in recent years because of: (i) the wide-
spread incidence of poverty and high vulnerability of
large sections of the populations of CDDCs to food
price shocks, and (ii) social unrest (and political
instability) including food riots in recent years. The
provision of social safety nets for the long-term food
insecure is not contested, but there is little agree-
ment on how to protect vulnerable groups from
transitional food insecurity. In the context of high
food prices in recent years, one policy option that is
receiving renewed attention is to create emergency
food reserves (discussed in the next chapter).


2. POLICy RESPONSE:
EMPLOyINg EMERgENCy
fOOD RESERVES TO
OVERCOME fOOD
INSECuRITy


2.1. Emergency food reserve
systems


The 2008 food crisis exposed weaknesses in the
international food system that disproportionately
threatens the world’s poor and malnourished popu-
lations. Arguably, a further factor that exacerbated
that crisis was the short-term supply shocks that
resulted from restrictions imposed on food exports
by individual national governments (Conceição and
Mendoza, 2009; Headey, 2011a; Timmer, 2010; von
Braun, 2008). This response was widespread: gov-
ernments in Asia, Africa and Latin America imposed
a variety of non-market measures to ensure sup-
plies of their staple foods and shield their consum-
ers from the worst of the price spikes. Common to
all these cases was not only the widespread use of
non-market measures, but also their lack of coor-
dination. An extreme case concerns the world rice
market which evaporated when the governments


Box 3.3. How vulnerable to price spikes are developing countries that are highly dependent on food
and fuel imports? (continued)




89


cHapter III: the diRect effects of the 2003-2011 commodity boom


of three of the world’s main rice-producing na-
tions imposed export restrictions on rice between
November 2007 and March 2008 (Box 3.1). Prices
more than doubled by May 2008, and the with-
drawal from trade by the producing nations effec-
tively suspended the international rice market, ren-
dering ineffective any foreign exchange reserves
that net rice-importing nations had earmarked for
emergency rice purchases.


However, the aggregate effect of the unilateral
withdrawals from the international market by in-
dividual countries ensured that the protection they
achieved for their domestic market was short-lived
and that the medium- and long-term threats of the
crisis worsened. This applied to both net exporters
and importers of traded food commodities.


For food-exporting countries, protectionist meas-
ures delayed the transmission to domestic con-
sumers of the price inflation on the international
market. But the resulting supply shock accelerated
this inflation, such that when domestic stocks were
exhausted and price controls ceased, resuming im-
ports during the boom was much more expensive.
In the meantime, the net rice-exporting countries
had damaged their relations with their import-
dependent trading partners. In addition, domestic
producers suffered income losses from price con-
trols employed domestically and from the loss of
their export markets.


Countries relying on imports for their food security
predictably suffered the most. Along with the effects
of any price or trade controls they imposed, the rapid
inflation of international prices meant most countries
faced a fiscal quandary: whether to use their foreign
exchange reserves to purchase food on the inter-
national market, or to continue to fund basic public
services. For many of the poorest governments, high
prices and tight international supplies meant that
importing food was beyond their reach, whatever
their priorities.


As policymakers review the changes to the interna-
tional food system that would be necessary to pre-
vent and/or better cope with future crises, the expe-
rience from the 2008 food crisis points to the need
for supranational grain reserves of some kind. The
following are some general arguments concerning
such a reserve:


• Food security strategies based on spot transac-
tions on the market instead of physical reserves
may have been cheaper and more flexible to op-
erate during good times, but they proved unsus-
tainable for governments with limited resources
when the crisis peaked in early 2008. For those
poorer countries, access to some external physi-
cal reserves is probably necessary (Timmer,
2010).


• Since it is impossible to guarantee that major
food-exporting countries will continue exporting
during future crises, any multilateral physical
grain stocks must include ownership and loca-
tion provisions that guarantee access to import-
dependent countries.


• Regional specificities and logistical constraints
imply that some form of regional body will pro-
vide the most cost-effective, responsive man-
agement of these multilateral grain reserves.


Initiatives are well under way to establish re-
gional grain reserves among countries with food
insecure populations. The primary example is the
ASEAN Emergency Rice Reserve (AERR), main-
tained since 1979. In October 2011, following a
five-year pilot project that spanned the 2008 food
crisis, ASEAN agreed on a new, strengthened ver-
sion of the reserve, called the ASEAN Plus Three
Emergency Rice Reserve (APTERR). 21 The size,
funding and coverage of the reserve were signifi-
cantly expanded by the addition to the agreement
of the “Plus Three” nations: China, Japan and the
Republic of Korea.22


Another established example is the Latin America
and Caribbean Emergency Response Network
(LACERN). But LACERN’s mandate is narrower than
that of a regional grain reserve operated by the gov-
ernments of member States. It is devoted mainly to
servicing emergency response efforts in the region
by the WFP and its partners, and it stocks ready-to-
eat biscuits rather than commodity grains (Balletto
and Wertheimer, 2010; SWAC, 2010).


In addition to these examples, regional grain re-
serves are at varying stages of negotiation in Africa
and South Asia. The following section examines the
major issues facing these initiatives, and their poten-
tial to improve food security.


2.1.1. Overview of current food reserve
initiatives


The South Asian Association for Regional Coop-
eration (SAARC) began discussing a regional grain
reserve as early as 1988, and in 2007 the group
signed an agreement to create the regional SAARC
Food Bank. The agreement committed the eight
SAARC member States23 to earmark a regional re-
serve of approximately 242,000 tons of grain from
their national stocks, with India providing 150,000
tons of the total. The size of the planned reserve
was later increased to nearly 500,000 tons. The re-
serve is limited to responding to a food emergency
following a request from one member State to the
others.24 Despite being signed into force, the crea-
tion of the SAARC Food Bank has stalled25 due to
hesitations among member States in implementing


Changes to the
international food
system would
be necessary
to prevent and/
or better cope
with future crises.
The 2008 food
crisis points to
the need for
supranational
grain reserves of
some kind.


Since it is
impossible
to guarantee
that major
food-exporting
countries
will continue
exporting during
future crises,
any multilateral
physical grain
stocks must
include ownership
and location
provisions
that guarantee
access to import-
dependent
countries.




90


COMMODITIES AND DEVELOPMENT REPORT


contributions, and reservations about its triggers and
its maintenance (Rahman, 2011; Robinson, 2011).


The SAARC Food Bank’s organization and proposed
trigger arrangements resemble those of the AERR. In
general, the AERR agreement deferred to the sover-
eignty of member States. The physical composition
of its stock was earmarked from national stocks and
its trigger mechanism depended on rigid bilateral
requests and agreements. Thus, when its member
States encountered an emergency, they preferred
to turn to international organizations for assistance
instead of requesting aid from their neighbours
through the AERR, especially as the AERR’s rice had
to be provided on what amounted to commercial
terms (Daño and Peria, 2006).


The recent APTERR agreement expands on the AERR
in several respects. The size of the reserve has been
increased tenfold, to 787,000 tons, comprising the
existing 87,000 tons contributed by ASEAN member
States to the AERR, plus 300,000 tons from China,
250,000 tons from Japan and 150,000 tons from
the Republic of Korea. APTERR will be managed and
owned regionally instead of by member States, and
will be stored in China, Japan, the Republic of Ko-
rea and the ASEAN countries that are dependent on
food imports (SWAC, 2010). APTERR’s objectives are
also more ambitious than those of its predecessor:
as well as being an emergency reserve, it aims to
stabilize rice prices in the region.


In Africa, the governments of the member States
of the Southern African Development Community
(SADC) have discussed a regional food reserve since
the 1980s. In 2000-2001, they drafted the initial plan
for the Regional Food Reserve Facility (RFRF), which
has an ambitious set of objectives, including price
stabilization and emergency response. The reserve
would include 500,000 tons of food, comprising four
kinds of cereals and livestock and representing ap-
proximately three months of average consumption.
Net exporters will store the stock, but it will be man-
aged by the regional body (Zunckel, 2010). SADC
has completed the initial exploratory phases of the
RFRF, but it has stalled prior to the implementation
stage due to disagreements among member States
about the reserve’s cost and the breadth of its man-
date (Rwelamira, 2009).


The most recent regional reserve initiative involves
the Economic Community of West African States
(ECOWAS). The grouping is currently evaluating differ-
ent options for a potential reserve. To date, the main
proposed plans are (ECOWAS 2011; SWAC, 2010):


• RESOGEST: In 2007, the member States of the
Permanent Inter-State Committee for Drought
Control in the Sahel (CILSS) initiated negotia-
tions over what is now proposed as RESOGEST,
a network enabling coordination among food


stock boards in the Sahel and West Africa, and
providing for a regional reserve comprising 5 per
cent earmarked from each member State’s na-
tional stock. Once fully implemented, RESOGEST
would act as an emergency reserve and will
neither replace nor duplicate the work of na-
tional boards. Its use would therefore depend on
requests and agreements between the govern-
ments of the member States.


• PREPARE: In 2009, the International Food Policy
Research Institute (IFPRI) and the World Bank
proposed that ECOWAS implement a two-lay-
ered emergency reserve system called Pre-Po-
sitioning for Predictable Access and Resilience
(PREPARE), initially as a five-year pilot project
aimed at benefiting 1129 of the 15 ECOWAS
member States (IFPRI, 2009). PREPARE would
have a small physical stock of 67,000 tons of
food that would cover an initial 30 days of food
needs in the event of an emergency. The second
“virtual reserve” layer, amounting to a fund from
contributions by member States and managed
by a technical commission, would trade on the
futures market, as needed, to effect price ad-
justments and/or procure an additional 60 days
of food needs.30 The PREPARE system would be
triggered by volatility on the international com-
modity markets, and not by a government re-
quest or by a natural disaster.


• Local grain banks: Non-governmental organiza-
tions (NGOs) have highlighted the value of village
grain banks in countries such as Burkina Faso,
Mali and Niger. They offer the benefit of an im-
mediate response in the event of a food short-
age, as well as localizing any economic benefits
that flow from the operation of the grain bank.


Experiences and negotiations concerning these
three regional initiatives reveal some major issues
that would need to be resolved. Four of these are
discussed in the following subsections, namely:


A. Setting achievable objectives


B. The scale and components of a reserve system


C. The mix of commodities to stockpile


D. Aligning the interests of exporters, importers,
rich and poor neighbours


A. SELECTINg AChIEVAbLE
ObjECTIVES


Food storage aims to smooth food consumption over
time, balancing periods of surplus and deficit food
production, including emergency shortages. Over
time, the scale of food reserves employed by popu-
lations has spanned a wide range, from individual
households to the informal world grain reserves held


In Africa, at
least three


regional food
reserve initiatives


are under
consideration.


Food storage
aims to smooth


food consumption
over time,


balancing periods
of production


surplus with
ones of deficit,


including
emergency
shortages.




91


cHapter III: the diRect effects of the 2003-2011 commodity boom


in the United States and Canada after the Second
World War (Puchala and Hopkins, 1982).


As the scale of food reserves has grown, as the
economies around them have become more com-
plex, and as storage and transportation technologies
have advanced, the number and ambition of the
objectives in maintaining such reserves has grown
as well. From insurance against emergencies and
consumption smoothing, reserves are increasingly
being utilized as instruments for more elaborate in-
terventions in food markets. The following are some
of the general reasons why communities have used
food reserves (Murphy, 2009):


• As insurance against food emergencies: What-
ever their causes, food emergencies are often
sudden and unforeseen, and stored food can
provide a ready, accessible food supply that
can feed the affected population in these ex-
traordinary situations. Although such a supply
is available for only a limited period, it can
sustain at-risk populations until the situation
improves or until more durable programmes
reach them.


• To smooth consumption over time: The season-
ality of agriculture and fisheries requires that
excess food production during brief harvesting
seasons be stored for distribution over the re-
mainder of the year, when consumption exceeds
production.


• To address missing markets: Because food is
an essential good, communities cannot endure
the gaps or failures in food markets when the
private sector undersupplies less profitable re-
gions or populations. A food reserve can help fill
these gaps in the private sector’s market cov-
erage. Viewed otherwise, a reserve can smooth
the gaps in the market’s geographic or social
distribution of food.


• To stabilize prices: During periods of low prices,
food producers are motivated to cut produc-
tion or change activities altogether. Conversely,
high prices strain consumers’ budgets. Since
food is essential for life, both of these price
extremes are harmful. Moreover, although a
well-functioning market will correct itself from
such extremes, the lead time required for this
to happen can be long, with potentially harm-
ful effects for food insecure or at-risk groups.
A community can use its food reserve to avoid
these price extremes and correction lead times
by selling to undercut high prices and buying to
boost low ones. Thus, price stabilization often
involves protecting the band between a floor and
a ceiling price. In addition to shielding the com-
munity from price extremes, maintaining a price
band reduces harmful volatility in food markets.


As a community adopts more ambitious market in-
tervention objectives for its food reserve, the costs
to operate the reserve increase. For example, dur-
ing non-emergency periods, an emergency reserve
need only purchase new grain to avoid spoilage. By
contrast, during the same period, a reserve with a
price stabilization mandate may be required to pur-
chase volumes of grain well in excess of its needs,
at a loss, in order to prevent domestic prices falling
below their mandated floor levels.


In practice, the use of grain reserves as a price
stabilization mechanism has yielded mixed results.
Whether or not a reserve manages to stabilize
prices, it inevitably consumes significant public
resources in doing so which could otherwise have
been deployed in other important areas, such as
investing in agricultural productivity or funding a
social safety net (Timmer, 2010). Moreover, execut-
ing a price stabilization mandate becomes more
difficult and expensive over time. However accu-
rately the reserve’s initial price band or floor price
matches the market, even the most skilled reserve
managers will be unable to fully predict future mar-
ket conditions in order to adjust the reserve’s par-
ameters accordingly. This is because the reserve
is inevitably a small player relative to the market
as a whole, which also means that its intervention
attempts at either end of its price band risk drain-
ing its budget without having the desired effect on
prices (Wright, 2009).


Indeed, most reserves created after the Second
World War with price stabilization objectives have
failed within a decade or two of their creation
(Wright, 2009). In a recent example, Malawi created
its National Food Reserve Agency (NFRA) in 1999
with a mandate of stabilizing domestic maize prices
(IMF, 2002). By 2001, the NFRA’s responses to chal-
lenging market conditions had left it heavily indebted
and depleted of reserves, forcing the Government of
Malawi to bail it out at a heavy cost to the public
budget, equivalent to approximately 1.5 per cent of
the country’s GDP (Zunckel, 2010). No sooner was
Malawi forced to dismantle its NFRA because of this
huge cost, than it was hit by three severe droughts
that affected nearly 8.5 million people between 2005
and 2007. This paradox underscores the difficult pol-
icy choices that governments face in their efforts to
guarantee food security to their populations in emer-
gency situations.


By contrast, reserve programmes designed as emer-
gency stocks (i.e. with no price stabilization objec-
tives) have a higher survival rate in the modern era.
For example, the AERR, although it was never used
by its member countries, had an emergency-only
mandate and operated for 32 years. For an example
of an emergency reserve that was more active than
the AERR, Ethiopia’s Emergency Food Security Re-


Most food
reserves created
after 1945 with
price stabilization
objectives have
failed within a
decade or two of
their creation.
By contrast,
reserve
programmes
designed as
emergency tools
have a higher
survival rate in the
modern era.




92


COMMODITIES AND DEVELOPMENT REPORT


serve Administration (EFSRA) is often studied in the
current debates about regional grain reserves. Ethio-
pia created the EFSRA in 1980, following the severe
droughts and famines the country experienced in
the 1970s. This reserve has proved vital in reacting
to subsequent droughts and famines and remains
active and relevant today. Its success is largely due
to its clear, emergency-only mandate. It also holds
relatively small stocks, which minimizes its effect on
market prices and its burden on government budg-
ets (Rachid and Lemma, 2011).


Therefore, for current discussions about regional grain
reserves, theoretical and practical arguments suggest
that emergency response is a more feasible mandate
than price stabilization. Furthermore, in the absence
of a market intervention or price stabilization man-
date, the Ethiopian example suggests that an emer-
gency reserve should be only as large as is needed
to respond to an emergency, which limits its size and
distortive effects on markets and public budgets.


Should a reserve initiative contemplate a price stabi-
lization mandate, its regular operating budget should
be explicitly underwritten by emergency funding
facilities of the size and responsiveness that it will
need when it inevitably has to protect its price band.


b. SCALE AND
COMPONENTS Of A
RESERVE SySTEM


Grain reserves are on the post-2008 food and fuel
crisis agenda of international organizations such
as the, IFPRI, WFP and the World Bank. The work
of these institutions in this area has been promi-
nent, including, most recently, support to the ongo-
ing ECOWAS deliberations regarding a West African
grain reserve.31


The IFPRI’s proposed framework for the grain re-
serve comprises the following three components,
each operating at a different scale (von Braun, Lin
and Torero, 2009):


• An independent emergency physical reserve.
This would be equivalent to approximately 5 per
cent of food aid flows and stocked by the main
grain-producing countries. It would be funded
by a “club” of participating countries, operated
by the WFP, and located at strategic points near
or in food insecure populations using existing
national storage infrastructure. This reserve
would be used solely for emergency response
purposes.


• A coordinated international price stabilization
reserve. This would comprise a small percent-
age of each member State’s domestic reserves,
and would be overseen by the United Nations or
another international body. It would be managed


by a technical commission that would use the
reserve, as needed, to effect price adjustments
on the market. The international reserve would
be used to stabilize commodity food prices on
the spot market.


• A “virtual reserve” The fund would normally
consist not of actual budget expenditures, but
of promissory, or virtual, financing by a group
of States (e.g. the G20). The fund, which would
be drawn upon by the high-level technical com-
mission only when needed for intervention in the
futures market is a notional commitment to sta-
bilize prices which has the effect of limiting price
volatility on those markets. It has the advantage
of incurring much lower costs than any interven-
tion through physical buffer stock management.


With government budgets throughout the world
strained by the ongoing global economic and finan-
cial crisis, the second element – an expensive global
price stabilization reserve – is off the table for the
foreseeable future. The G20 reportedly rejected the
idea of a global reserve proposed by the Government
of Ukraine32 on the grounds that it would cost too
much to operate.33


The World Bank and IFPRI have proposed to ECOW-
AS that it construct a reserve system based on the
remaining two elements: a small physical reserve
of 67,000 tonnes of grain, representing 30 days of
food consumption, complemented by a virtual re-
serve system designed to procure an additional 60
days of food requirements. One of the advantages
of this proposal is the inclusion of a village-level
system of silos. Especially for the emergency stock
goal of this programme, the village silos would pro-
vide the most immediate response – the “first aid”
in the event of a shortage. The scale of the project
is daunting: engaging thousands of local villages
in the design and implementation of a coordinated
system, refurbishing old granaries and building
new ones, and training all of the local managers.
Its operation will also be complex, particularly in
designing an effective central stock monitoring
system that does not undermine the advantages of
local ownership and control.


If ECOWAS were to pursue a network of village-level
grain reserves, it could build on the existing, albeit
patchwork, infrastructure of granaries and grain re-
serves in its member countries. For example, since
1972 the National Federation of Naam Associations
(FNGN)34 – a federation of peasant associations in
Burkina Faso – has overseen the construction of a
network of approximately 368 greniers de sécurité
alimentaire (food security granaries) in the country.
Since 2002, the network has benefited from a credit
facility funded by SOS Faim, a Belgian NGO which
loans operating funds to the community granary com-


Grain reserves
are on the post-
2008 food and


fuel crisis agenda
of international
organizations.




93


cHapter III: the diRect effects of the 2003-2011 commodity boom


mittees.35 Including the FNGN granaries, Oxfam esti-
mates that by 2002 Burkina Faso had approximately
2,000 granaries that could be employed as local food
reserves, although a majority of these were unused.36


Similarly, in Niger, the Federation of Peasant As-
sociations of Niger (FUGPN-MOORIBEN) operates
a network of 213 local grain reserves as part of a
system of integrated services that it offers to its
member associations. The MOORIBEN granaries are
part of the 4,647 grain banks recorded by the Niger
Government in a 2008 census. In Mali, the Govern-
ment built 759 granaries in 2005-2006, although
the programme has suffered from irregularities in
the management of some of its grain banks.40 The
programmes in these examples are disparate and a
large proportion of the existing granaries are likely
either unused or in disrepair. Nonetheless, they rep-
resent a foundation of infrastructure and experience
on which ECOWAS could build a successful village-
level grain reserve system.


C. ThE COMMODITy MIx TO
bE STOCkPILED


APTERR is unique among the regional reserve initia-
tives discussed here in that it stocks only one kind of
grain: rice. This reflects the predominance of rice in
the diets, cultures and even politics of East and South-
East Asian peoples. A single-commodity stockpile pro-
vides the benefit of reduced complexity, as APTERR
only has to interact with one commodity value chain
and market. But this makes it very exposed to volatil-
ity and supply shortages in the rice market.


The proposed SAARC Food Bank is intended to stock
both wheat and rice. Since the contents of the re-
serve are earmarked from the national stocks of
each member State, the level of stocks of the two
grains is left for each country to determine.41


Both the SADC Regional Food Reserve Facility and
the two regional-level proposals being considered by
ECOWAS would stock four kinds of grains – maize,
millet, sorghum and rice – reflecting the general di-
versity of dietary preferences in sub-Saharan Africa.
In addition to providing the above grains for food, the
SADC reserve would include feed grains to sustain
the important livestock herds in Southern African
countries (Zunckel, 2010; ECOWAS, 2011). These
two African initiatives, which would stock multiple
commodities, present new challenges and opportu-
nities. If either of these reserves were implemented,
they would have to contend with the complexities
of interacting with four different value chains and
markets. The reserves’ economies of scale would
be reduced as they would be splitting their buying
power among four products as well as any marginal
infrastructure investments they would require to
transport or store any of the grains separately. They


would also face the challenge of not having an ex-
isting model of a multi-commodity regional reserve
from which to draw lessons.


On the other hand, the use of multiple commodities
also presents some trading advantages. Provided the
proposed SADC and ECOWAS reserves allow a vari-
able weighting of each grain within the total reserve,
managers could stock their reserves with the lowest
priced grains at a given time. This kind of internal ar-
bitrage is not possible for single-grain reserves, such
as APTERR, and can minimize a reserve’s exposure to
the highest priced grains. Perhaps the most appealing
aspect of a multi-grain reserve is that it can poten-
tially delay the self-reinforcing paradox that threatens
any grain reserve with a price stabilization mandate,
namely: for price-taking import-dependent coun-
tries, high prices often coincide with scarce supplies,
meaning that the reserve sells the stock it built dur-
ing periods of low prices only to risk replenishing it at
much higher prices, which itself contributes to further
inflation. Provided gaps persist between the prices of
its composite grains, a multi-grain reserve can delay
this trap at the top of the price band.


Similarly, the grain mix of the two African reserves
contains two grains traded on international com-
modity markets – rice and maize – and two traded
on domestic and regional markets – sorghum and
millet. Although a generalized food crisis would push
up prices of all grains in a given African country, the
gap between the reserve’s commodity and non-
commodity grains may provide further opportunities
to economize and extend the relief the reserve can
provide in periods of high prices.


D. ALIgNINg ThE INTERESTS
Of ExPORTERS AND
IMPORTERS, AND RICh
AND POOR NEIghbOuRS


One of APTERR’s great strengths is its success in ap-
pealing to the varied interests of its diverse members:
from the smaller ASEAN economies dependent on rice
imports, to rice exporters Thailand and Viet Nam, and
to the large, economically more diversified markets of
China, Japan and the Republic of Korea. This presents
its own challenges related to the various members’
influence in the reserve agreement and its constitu-
ent national markets (Daño and Peria, 2006). But
this seems an acceptable compromise in return for
achieving a regional arrangement that has sufficient
physical and financial reserves, as well as productive
capacity, among all its members to be self-sufficient
in rice in the event of another food crisis.


The proposed SAARC Food Bank would involve the
participation of India, the region’s largest economy
and a major food producer, and Pakistan, its primary
rice exporter.


Existing granaries
represent a
foundation of
infrastructure and
experience on
which ECOWAS
could build a
successful village-
level grain reserve
system.


Grain reserves
stocking multiple
commodities
present both new
challenges and
opportunities.




94


COMMODITIES AND DEVELOPMENT REPORT


In ECOWAS, two of its largest members, Ghana and
Nigeria, have not participated in deliberations on a
food reserve so far. Although there are no major food-
exporting countries in Middle and West Africa, the
economies and government budgets of Ghana and Ni-
geria benefit from lucrative petroleum sectors. For de-
veloping countries dependent on oil and food imports,
the 2008 crisis posed the double threat of high prices
for both core commodities. Thus the inclusion of these
two countries in a regional reserve system, even if it
would not materially improve the region’s food bal-
ance, would reduce the impact of future concurrent
oil and food crises owing to the financial resources
these two larger economies could contribute. Without
the participation of the major economies in the region,
an ECOWAS regional reserve system would require
significant funding from international donors, which
might be feasible but would remove an element of
control and flexibility from the management body.


The SADC Regional Food Reserve Facility initiative
has stalled, in part due to a misalignment of expec-
tations among its 15 member States. The most food
insecure member States are also its poorest, mean-
ing that they have the most to gain from an ambi-
tious emergency grain reserve, but they do not have
the financial resources to fund it. They would neces-
sarily require funding from South Africa, the largest
and wealthiest economy among them. However, al-
though South Africa is a net food importer, it shows
little interest in the initiative. Since it has not known
any serious food shortages since 1994, it considers
funding the reserve a major expense, given its mini-
mal emergency food needs. Instead of an emergency
contingency, South Africa’s food security priority is
price stabilization, an objective it feels it can best
achieve through market-based activities.


From the experience of the four current initiatives,
any future initiatives on regional grain reserves
would need to negotiate compromises that align the
interests of price-taking, import-dependent States
with the respective regions’ largest economies and
primary food-producing States.


2.2. key considerations for
addressing food insecurity
through emergency food
reserves


The sharp differences noted in the South-East Asian
and African situations indicate how a regional re-
serve has to respond to the particular needs of the
region concerned. A one-size-fits-all model will not
work. ECOWAS, for example, has opted for prolonged
regional consultations for its proposed system rather
than having it designed and determined by govern-
ments, the ECOWAS Secretariat or international do-
nors alone. This might take longer, but if the consul-


tations are properly conducted and respected by all
parties, the design is more likely to be successful in
the long run. For these reasons, no blueprint for a food
reserve is proposed in this report. However, some fur-
ther considerations are offered in this section. There
can be either a “bottom-up” or a “top-down” ap-
proach to creating food reserves. Most of the cases,
so far, have adopted top-down approaches, designed
and controlled by national governments. However, that
is not the only feasible method. Ousseini Salifou, the
ECOWAS Commissioner for Agriculture, the Environ-
ment and Water Resources, described the interlocking
needs of humanitarian relief and capacity-building to
prevent emergencies as follows


No regional reserve affordable to our economies
could respond on its own to a substantial food
crisis, like those provoked by major climatic
shocks or big increases in price. The first line
of defence lies in nearby stocks for communi-
ties to mobilise. The second line of defence is
national stocks, which national arrangements
can make use of. The third line of defence is the
regional reserve and mechanisms of solidarity, as
between countries and at the international level.
None of these three levels must be neglected if
we want to pursue these twin goals: respond use-
fully to the needs of people affected by hunger,
while sustainably strengthening their capacity to
withstand such shocks… No country can accept
the need to rely permanently on international aid
in order to guarantee its citizens’ right to food.
(cited in Lines, 2011: 21)


This indicates a combined approach, using top-down
methods as a way of supporting the strengthening of
food security from below. The important questions are
where stocks should be located and at which level
they should be controlled. This can be anywhere from
a village grain bank to a global virtual reserve (as in
the IFPRI proposal); or it can be at several different
levels simultaneously. Any decision on this will de-
pend on the scope, scale and nature of particular hun-
ger and food shortages. There are three broad views:


• Food security has three dimensions: (i) availabil-
ity of sufficient quantities of food of appropriate
quality, supplied through domestic production or
imports; (ii) access by households and individu-
als to adequate resources to acquire appropriate
foods for a nutritious diet; and (iii) utilization of
food through adequate diet, water, sanitation and
health care (FAO, 2003).


• Hunger can be seen as an essentially personal,
household or local problem: each hungry person
faces hunger in their own place and because of
their own predicament. Resolving this requires
an assurance everywhere of local access to
food, thereby fulfilling each citizen’s right to


Any future
initiatives on


regional grain
reserves would


need to negotiate
compromises


aligning the
interests of all


stakeholders in
the region.


“No country
can accept the


need to rely
permanently


on international
aid in order to
guarantee its


citizens’ right to
food.”.




95


cHapter III: the diRect effects of the 2003-2011 commodity boom


food. This implies a bottom-up system, based
on local provision, in the first instance, and then
national provision.


• However, a more common interpretation inter-
nationally is that hunger is caused by the inad-
equacy of supplies on organized markets, and
especially global markets, in food products.
This leads to an emphasis on the volumes of
global supply and proposals for global or per-
haps regional stocks.


Deciding on too high a level for food reserves (and am-
bitious food policies generally), and concentrating on
aggregate production and availability only, can lead to
neglect of the vital question of access to food and other
local questions such as post-harvest losses. High-
level measures can also take a long time to achieve.
In 1975, the United Nations General Assembly formally
established a 500,000-ton International Emergency
Food Reserve, to be placed at the WFP’s disposal, but
it has never worked as intended. On the other hand,
in many places a household or village grain store can
be built in a day and costs very little. In any case, vil-
lage or household stores would need to be improved
or supplied, regardless of global decisions. They do not
require global decisions but household, local or, at the
most, national decisions, which can be much more eas-
ily achieved. Village grain reserves may help to reduce
post-harvest losses and contribute to enhancing food
security, particularly in isolated cases of food crises.
They may, however, need to be complemented by other
policies at the national level if they are to be effective
in cases of large-scale and widespread food shortages.


It could be argued that the crisis in recent years has
been mainly one of industrialized, high-input agricul-
ture, not of food production in general: the relative
price changes reflect “peak oil” and even “peak fer-
tilizer” situations, but not necessarily “peak food” as
has been widely suggested. This calls into question
the continued reliance on fossil fuels and mineral
fertilizers as well as imports of cereals for achieving
food security while at the same time assuring ad-
equate incomes for farmers. It can also be seen that
the export orientation approach, which dominated
development strategy in the 1980s, failed to meet
countries’ foreign exchange requirements – earn-
ings from many traditional export crops (such as cof-
fee and cotton) failed to fill their foreign-exchange
gaps. Even if they did, the temporary collapse of food
markets (through export bans and restrictions) in re-
sponse to the recent crisis meant that NFIDCs could
not meet their food requirements through imports or
via markets when they needed these the most.


External agencies seeking to support regional food re-
serves need to take a mobilizing and developmental
approach, not a controlling one. They need to have good
knowledge of the agricultural and commercial situation


of any region or country where they operate. Particular
restraint is called for from any agency or NGO whose
experience lies in supplying food in an emergency zone
from outside the region concerned or as part of large,
all-encompassing programmes which over a long pe-
riod have underplayed the importance of agriculture
and domestic generation of food security.


It is important to tie in closely with early warning
and monitoring systems such as the United States-
funded Famine Early Warning Systems Network
(FEWS NET) and the United Nations’ Food Security
and Nutrition Analysis Unit for Somalia. Collaboration
is also desirable with agencies such as the Interna-
tional Institute of Tropical Agriculture (IITA) for the
development and use of non-traded crops/staples,
and the World Agroforestry Centre and others for the
development of agroecological methods.


Any developing country programme, especially in
Africa, should aim to rely as much as possible on
smallholders’ surpluses for supplies for positive de-
velopmental effects. It should use regional supplies,
and aim to achieve a balance between regional sur-
pluses and deficits. These may be topped up from
external sources, where necessary, but still giving
preference to sourcing from developing countries,
if possible in the same continent. The decentral-
ized approach suggested here should greatly help
to develop the private agro-food sector in African
countries (understood to include smallholder farm-
ing and informal food trading), as well as domestic
and regional trade in agricultural and food products.


The bottom-up approach implies that food stocks and
storage are primarily a matter for national policy, with
regional reserves important as a backstop. Policies
that successfully coordinate food surplus areas and
deficit areas should be able to avoid the need to deploy
reserves. The management structure needs to be con-
trolled by the regional authority, but at this level more
coordination will be required in African regions than
for APTERR because of the greater number of crops
involved and the greater complexity of the relationship
between surplus and deficit countries in this region.
Therefore its administration is likely to be more ex-
pensive than that of APTERR. It is also more likely to
succeed if it meets the standards of consultation and
transparency which seem to have been achieved at
the ECOWAS Dakar conference in October 2011.


The next chapter of this report seeks to empiri-
cally evaluate the indirect effects of the commodity
boom through an analysis of the following issues:
attracting of investments (e.g. the much-discussed
FDI boom in Africa), government use of increased
commodity revenues, diversification and the role of
precautionary strategic investment (including the
so-called “land grabs” and purchasing of mineral
resource rights).


Village grain
reserves may
help to reduce
post-harvest
losses and
contribute to
enhanced food
security.


Any developing
country
programme,
should aim to
rely as much
as possible on
smallholders’
surpluses
for supplies
for positive
developmental
effects.




96


COMMODITIES AND DEVELOPMENT REPORT


refereNces


Akiyama T, Baffes J, Larson D and Varangis P (2001). Market reforms: Lessons from country and commodity experiences.
In: Akiyama T, Baffes J, Larson D and Varangis P, eds. Commodity Market Reforms: Lessons of Two Decades. Washington, DC,
World Bank: 5–34.


Anderson K and Masters A (2009). Introduction and Summary. In: Anderson K and Masters A. eds. Distortions to Agricultural
Incentives in Africa. Washington, DC, World Bank: 3-35.


Andreosso-O’Callaghan B and Zolin B (2010). Long-term food price changes: How important is the speculative element? Transition
Studies Review, Special Issue, 17: 4, 624–637.


Asian Development Bank (2008). FoodPricesandInflationinDevelopingAsia:IsPovertyReductionComingtoanEnd? A special
report. Mandaluyong City, the Philippines.


Baffes J and Haniotis T (2010). Placing the 2006/08 commodity price boom into perspective. Policy Research Working Paper 5371,
World Bank, Washington, DC.


Balcombe K, Bezemer D, Davis J, and Fraser I (2005). Livelihoods, farm efficiency and poverty in rural Georgia Applied Economics.
Volume, 37(15 / 20): 1737 – 1745.


Balletto R and Wertheimer S (2010). Emergency preparedness tools and activities in Latin America and the Caribbean. In: Omamo
SW, Gentilini U and Sandström S, eds. Revolution: From Food Aid to Food Assistance. Rome, World Food Programme: 275–294;
available at: http://home.wfp.org/stellent/groups/public/documents/newsroom/wfp225646.pdf.


Barker T, Bashmakov I, Alharthi A, Amann M, Cifuentes L, Drexhage J, Duan M, Edenhofer O, Flannery B, Grubb M, Hoogwijk M, Ibitoye
FI, Jepma CJ, Pizer WA and Yamaji K (2007). Mitigation from a cross-sectoral perspective. In: Metz B, Davidson OR, Bosch PR,
Dave R and Meyer LA, eds. Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report
of the Intergovernmental Panel on Climate Change. Cambridge and New York, Cambridge University Press: 621-677.


Bezemer D and Headey D (2008). Agriculture, development and urban bias. World Development, 36(8): 1342-1364.


Bezemer, D and Szökol B (2011). Causes of price developments in cereals. (Mimeo), University of Groningen, Groningen,
the Netherlands.


Burger K, Daviron B and Flores V (2009). International commodity organizations and the governance of global value chains. Paper
presented at the International Association of Agricultural Economists Conference, organized by AgEcon Search in Beijing,
16–22 August 2009.


Calvo-Gonzales O, Shankar R and Trezzi R (2010). Are commodity prices more volatile now? A long-run perspective. Policy Research
Working Paper No. 5460, World Bank, Washington, DC.


Cancun Accord (2011). Report of the Conference of the Parties on its Sixteenth session, at Cancun, 29 November to10 December 2010.
FCCC/CP/2010/7/Add.1; available at: http://unfccc.int/resource/docs/2010/cop16/eng/07a01.pdf#page=18.


Clay E, Keats S and Lanser P (2011). Incorporating global food price spikes into the risk management agenda. London, Overseas
Development Institute.


Conceição P and Mendoza RU (2009). Anatomy of the global food crisis. Third World Quarterly, 30(6): 1159–1182.


Cooke B and Robles M (2009). Recent food prices movements: A time series analysis. IFPRI Discussion Paper (942). http://www.
ifpri.org/publication/recent-food-prices-movements.


Couharde C, Davis J and Generoso R (2011). Do remittances reduce vulnerability to climate variability in west african countries?
Evidence from panel vector autoregression. UNCTAD Working Paper Series on Commodities and Development, UNCTAD,
Geneva, September.


Cuddington JT and Jerrett D (2008). Super-cycles in real metal prices? IMF Staff Papers, 55(4): 541–565, IMF, Washington, DC.


Daño E and Peria E (2006). Emergency or expediency? A study of emergency rice reserve schemes in Asia. Quezon City, Philippines,
AFA and AsiaDHRRA; available at: http://asiadhrra.org/wordpress/wp-content/uploads/2008/05/rice%20reserve%20scheme.pdf


Davis J (2004). The rural non-farm economy, livelihoods, and their diversification: Issues and options. Chatham, UK: NRI publication
ISBN 0 85954 563-6.


Dawe D (2008). Have recent increases in international cereal prices been transmitted to domestic economies? The experience in
seven large Asian countries. ESA Working paper No. 08-03, FAO, Rome.




97


de Hoyos RE and Medvedev D (2011). Poverty effects of higher food prices: A global perspective. Review of Development Economics,
15(3): 387–402.


de Hoyos RE and Lessem R (2008). Food shares in consumption: New evidence using engel curves for developing countries.
Background Paper for the Global Economic Prospects 2009. Washington, DC, World Bank.


de Schutter O (2010). Agro ecology and the Right to Food. Report submitted by the Special Rapporteur on the right to food to the
UN Human Rights Council, Sixteenth session, Geneva. Document number: A/HRC/16/49. Available at: http://www.srfood.org/
index.php/en/component/content/article/1174-report-agroecology-and-the-right-to-food


DiCaprio A and Gallagher K (2006). The WTO and the shrinking of development space – How big is the bite? Journal of World
Investment and Trade, 7(5): 781-803.


ECOWAS (2011). Rapport final du Task Force sur le Stock Régional de Sécurité Alimentaire de la CEDEAO. Dakar, Sénégal, ECOWAS;
available at: http://roppa.info/IMG/pdf/Rapport_final_Task_Force_sur_le_stock_regional_de_securite_alimentaire.pdf.


ECOWAS, WAEMU, CILSS, RESOGEST (2012). Report of the Taskforce on Regional Food Security Reserve. Prepared with the
technical support of Le hub Rural. Dakar, Sénégal, ECOWAS: available at: http://www.westafricagateway.org/files/Regional%20
food%20reserve_en_light.pdf


FAO (2003). TradeReformsandFoodSecurity:ConceptualizingtheLinkages. Rome.


FAO (2007). The State of Food and Agriculture. Rome; available at: www.fao.org/docrep/010/a1200e/a1200e00.htm.


FAO (2008a). Food Outlook, June. Rome; available at:www.fao.org/docrep/010/ai466e/ai466e00.HTM.


FAO (2008b). Food Outlook, November. Rome; available at: http://www.fao.org/docrep/011/ai474e/ai474e15.htm.


FAO (2008c). The State of Food and Agriculture – Biofuels: Prospect, Risk and Opportunities. Rome.


FAO (2008d). The State of Food Insecurity in the World 2008: High Food Prices and Food Security – Threats and Opportunities.
Rome. ISBN 978-92-5-106049-0.


FAO (2010). The State of Food Insecurity in the World 2010: Addressing Food Insecurity in Protracted Crises. Rome. ISBN 978-92-
5-106610-2.


FAO (2011a). Food Outlook, June. Rome; available at: http://www.fao.org/docrep/014/al978e/al978e00.pdf.


FAO, IFAD, IMF, OECD, UNCTAD, WFP, World Bank, WTO, IFPRI, and UN HLTF. (2011). Price Volatility in Food and Agricultural Markets: Policy
Responses. Rome. Report prepared for the G20. Rome, FAO; available at: http://www.oecd.org/dataoecd/40/34/48152638.pdf.


G20 (2011). Report of the G20 Study Group on Commodities. Paris, G20, November; available at: http://www.g20.org/images/
stories/canalfinan/gexpert/01reportG20.pdf.


Ghosh J (2010). The unnatural coupling: Food and global finance. Journal of Agrarian Change, 10 (1): 72–86.


Gilbert CL (1996). International commodity agreements: An obituary notice. World Development, 24(1): 1–19.


Gilbert CL and Varangis P (2004). Globalization and international commodity trade with specific reference to the West African cocoa
producers. In: Baldwin RE and Winters LA, eds. ChallengestoGlobalization:AnalyzingtheEconomics. Chicago, IL, University of
Chicago Press: 131–165.


Headey D (2011a). Rethinking the global food crisis: The role of trade shocks. Food Policy, 36(2): 136–146.


Headey D (2011b). Was the global food crisis really a crisis? Simulations versus self-reporting. IFPRI Discussion Paper 01087, May;
available at: http://www.ifpri.org/sites/default/files/publications/ifpridp01087.pdf.


Headey D and Shenggen Fan (2008). Anatomy of a crisis: The causes and consequences of surging food prices. Agricultural
Economics, 39: 375–391.


IFPRI (2009). Eliminating drastic food price spikes – a three pronged approach for reserves. Note for discussion, Washington;
available at: www.ifpri.org/sites/default/files/publications/reservenote20090302.pdf (accessed November 2011).


IMF (2002). Malawi: The food crises, the strategic grain reserve, and the IMF. Washington, DC; available at: http://www.imf.org/
external/np/exr/facts/malawi.htm.


ITC (2011). LDCs terms of trade during crisis and recovery. ITC Trade Map Factsheet #3, Geneva; available at: http://www.intracen.org/.


Ivanic M and Martin W (2008). Implications of higher global food prices for poverty in low-income countries. World Bank Policy
Research Paper, 4594, World Bank, Washington, DC.


cHapter III: the diRect effects of the 2003-2011 commodity boom




98


COMMODITIES AND DEVELOPMENT REPORT


Jacks DS, O’Rourke KH and Williamson JG (2011). Commodity price volatility and world market integration since 1700. Review of
Economics and Statistics, 93(3): 800–813.


Kasterine A and Vanzetti D (2010). The effectiveness, efficiency and equity of market-based instruments to mitigate GHG emissions
from the agri-food sector. In: UNCTAD, Trade and Environment Review 2009/2010. Geneva, UNCTAD; available at: www.unctad.
org/ Templates/WebFlyer.asp?intItemID=5304&lang=1.


Lin J (2008). Prepared remarks for the Roundtable on Preparing for the Next Global Food Price Crisis. Organized by the Center for
Global Development, Washington, DC. October 17, 2008.


Lines T (2011). The potential establishment of emergency food reserve funds. UNCTAD, Working Paper Series on Commodities and
Development, Discussion paper 3, UNCTAD, Geneva.


Martin W and Anderson K (2012). Export restrictions and price insulation during commodity price booms. American Journal of
Agricultural Economics, 94(2): 422-427.


Maurice N and Davis J (2011). Unravelling the underlying causes of price volatility in world coffee and cocoa commodity markets.
UNCTAD Working Paper Series on Commodities and Development, UNCTAD, Geneva, September.


Mitra S and Josling T (2009). Agricultural export restrictions: Welfare implications and trade disciplines. IPC Position Paper.
Agricultural and Rural Development Policy Series. Washington DC, International Food and Agricultural Trade Policy Council;
available at: http://ictsd.net/downloads/2009/02/exportrestrictions_final.pdf.


Murphy S. (2009). Strategic grain reserves in an era of volatility. Minneapolis, MN, Institute for Agriculture and Trade Policy;
available at: http://www.iatp.org/documents/strategic-grain-reserves-in-an-era-of-volatility.


Niggli U et al. (2008). Organic farming and climate change. Geneva, International Trade Centre of UNCTAD/WTO; available at: www.
intracen.org/Organics/publications.htm.


Niggli U et al. (2009). Low greenhouse gas agriculture: Mitigation and adaptation potential of sustainable farming systems, Rev. 2.
Rome, FAO, April; available at: ftp://ftp.fao.org/docrep/fao/010/ai781e/ai781e00.pdf.


Nissanke M (2010). Mitigating commodity-dependence trap in LDCs through global facilities. Background paper for UNCTAD’s
The Least Developed Countries Report 2010. Geneva, UNCTAD; available at: http://www.unctad.org/sections/ldc_dir/docs/
ldcr2010_mnissanke_en.pdf.


OECD-FAO (2008). Agricultural Outlook 2008–2017. Paris and Rome; available at: http://www.fao.org/es/esc/common/ecg/550/
en/AgOut2017E.pdf.


Panitchpakdi S (2010). Statement on price volatility and market development. In: The Role of Commodities in Development.
Proceedings of the International Seminar organized by the Common Fund for Commodities, The Hague, 14 December 2009.


Puchala DJ and Hopkins RF (1982). International regimes: Lessons from inductive analysis. InternationalOrganization, 36(02): 245-275.


Rachid S and Lemma S (2011). Strategic grain reserves in Ethiopia. IFPRI Discussion Papers, International Food Policy Research
Institute, Washington, DC; available at: http://www.ifpri.org/sites/default/files/publications/ifpridp01054.pdf.


Rahman M (2011). Can South Asia benefit from ‘Asian Century’? The Financial Express, 21 December; available at: http://www.
thefinancialexpress-bd.com/more.php?news_id=159975&date=2011-12-21 (accessed 22 December 2011).


Robinson MJ (2011). Regional grain banking for food security: Past and present realities from SAARC initiatives. Jaipur, Consumer
Unity and Trust Society (CUTS) International; available at: http://www.cuts-citee.org/pdf/Discussion_Paper-Regional_Grain_
Banking_for_Food_Security.pdf.


Robles M, Torero M and von Braun J (2009). When speculation matters. IFPRI Issue Brief 57, International Food Policy Research
Institute, Washington, DC.


Rwelamira JK (2009). Strategic Regional Food Reserve Facility. Paper presented at a seminar at the National Agricultural Marketing
Council, Pretoria.


Sharma R (2011). Food export restrictions: Review of the 2007-2010 experience and considerations for disciplining restrictive
measures. FAO Commodity and Trade Policy Research Working Paper No. 32, FAO, Rome.


Slayton T (2009). Rice crisis forensics: How Asian governments carelessly set the world rice market on fire. SSRN eLibrary, 9 March;
available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1392418.


Smith P et al. (2007). Agriculture. In: Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report
of the Intergovernmental Panel on Climate Change (Metz B et al., eds.). Cambridge and New York, Cambridge University Press.




99


cHapter III: the diRect effects of the 2003-2011 commodity boom


Stiglitz JE (2007). What is the role of the state? In: Humphreys M, Sachs JD and Stiglitz JE eds. Escaping the Resource Curse. New
York, Columbia University Press: 23–52.


SWAC (2010). Regional solidarity to address food crises. Presented at the Sahel and West Africa Club 2010 Forum, Accra, Ghana
7-8 December; available at: http://www.oecd.org/dataoecd/38/30/46546442.pdf.


Timmer CP (2009). Did speculation affect world rice prices? ESA Working Paper No. 09-07, FAO, Rome; available at: http://
econpapers.repec.org/paper/faowpaper/0907.htm.


Timmer CP (2010). Reflection on food crises past. Food Policy, 35: 1–11.


Tordo S, Tracy BS and Arfa N (2011). National Oil Companies and Value Creation, Volume I: Case Studies. Washington, DC, World Bank


Torero M (2011). Alternative mechanisms to reduce food price volatility and price spikes. UK Government Foresight Project on
Global Food and Farming Futures, Science review: SR 21.


UN High Level Task Force on the Global Food Security Crisis (2010). Updated Comprehensive Framework for Action, September;
available at: http://un-foodsecurity.org/sites/default/files/UCFA_English.pdf.


UNCTAD (2006). The Least Developed Countries Report 2006: Developing Productive Capacities. New York and Geneva,
United Nations.


UNCTAD (2008). The Least Developed Countries Report 2008: Growth, Poverty and the Terms of the Development Partnership.
New York and Geneva, United Nations.


UNCTAD (2009). The Least Developed Countries Report 2009: The State and Development Governance. New York and Geneva,
United Nations.


UNCTAD (2010). The Least Developed Countries Report 2010: Towards a New International Development Architecture for LDCs.
New York and Geneva, United Nations.


UNCTAD (2011a). The Least Developed Countries Report 2011: The Potential Role of South-South Cooperation for Inclusive and
Sustainable Development. Geneva: United Nations.


UNCTAD (2012). Recent Developments in Key Commodity Markets: Trends and Challenges (TD/B/C.I/MEM.2/19). Paper prepared
for the Multi-year Expert Meeting on Commodities and Development, Geneva, 25–26 Janaury.


UNCTAD-UNEP (2008). Best Practices for Organic Policy: What Developing Country Governments can do to Promote the Organic
Agriculture Sector; available at: http://www.unep-unctad.org/cbtf/publications/UNCTAD_DITC_TED_2007_15.pdf.


UN-DESA (2009). World Economic and Social Survey 2009: Promoting Development, Saving the Planet. United Nations publication,
sales no. E.09.II.C.1. New York, United Nations.


UNDP (2007). Human Development Report 2007/2008: Fighting Climate Change: Human Solidarity in a Divided World. New York,
Palgrave MacMillan.


UNEP (2009). Financing a global deal on climate change. A green paper by the UNEP Finance Initiative Climate Change Working
Group, New York.


UNFCCC (2007). Investment and financial flows to address climate change. Bonn.


UNFCCC (2008). Investment and financial flows to address climate change: An update, FCCC/TP/2008/7, 26 November. Bonn.


UNFCCC (2009). Financing climate action: Investment and financial flows for a strengthened response to climate change.
Fact Sheet, June. Bonn.


Valensisi G and Davis J (2011). Least Developed Countries and the green transition: Towards a renewed political economy agenda.
MSM Working Paper Series, No. 2011/27. Maastricht School of Management. Maastricht.


von Braun J, Lin J and Torero M (2009). Eliminating drastic food price spikes: A three pronged approach for reserves. Note for
discussion. Washington, DC, IFPRI; available at: http://www.ifpri.org/sites/default/files/publications/reservenote20090302.pdf.


von Braun J (2008). Rising food prices: What should be done? Policy brief, IFPRI, Washington, DC; available at: http://www.ifpri.org/
sites/default/files/publications/bp001.pdf.


World Bank (2008a). World Development Report: Agriculture and Rural Development. Washington, DC; available at: http://www.
worldbank.org/WDR2008.


World Bank (2008b). Rising food prices: Policy options and World Bank response. Background note for the Development Committee.
Internal paper. Washington, DC.




100


COMMODITIES AND DEVELOPMENT REPORT


World Bank (2010). Rising global interest in farmland. Washington, DC; available at: http://siteresources.worldbank.org/INTARD/
Resources/ESW_Sept7_final_final.pdf.


World Bank (2011). Food price watch. February 2011 issue. Available at: http://www.worldbank.org/foodcrisis/food_price_watch_
report_feb2011.htmlWright B (2009). International grain reserves and other instruments to address volatility in grain markets.
Policy Research Working Paper Series, No. WPS5028, World Bank, Washington, DC; available at: http://ideas.repec.org/p/wbk/
wbrwps/5028.html.


Zunckel HE (2010). The Southern African response to food security and the global food crisis. Policy report. Series on Trade
and Food Security. Winnipeg, International Institute for Sustainable Development; available at: http://www.iisd.org/tkn/pdf/
southern_african_response_food_security.pdf.


Zurayk R (2011). Use your loaf: Why food prices were crucial in the Arab spring. The Observer, 17 July; available at: http://www.
guardian.co.uk/lifeandstyle/2011/jul/17/bread-food-arab-spring?intcmp=239.




101


NOTES
1. “Food security” refers to a situation where all people, at all times, have physical, social and economic access to sufficient, safe


and nutritious food that meets their dietary needs and food preferences for an active and healthy life (FAO, 2003).


2. For example, in sub-Saharan Africa, nearly two thirds of the total population and about 70 per cent of the poor live in rural areas.
For these poor people and for the bulk of the rural population, income and livelihoods depend primarily on agriculture, which
employs 90 per cent of the rural labour force. (World Bank, 2008a).


3. High prices of cereals caused disproportionate humanitarian hardship in the West Asia and North Africa, where 17 per cent of
the population lives on less than $2 a day (World Bank, 2010).


4. The SITC “all food items category” is used throughout this chapter (SITC 0+1+22+4).


5. The FAO (2010) estimates that the number of undernourished people in the world had risen from 850 million during the period
2005–2007 and to 910 million in 2008, and peaked at 1.03 billion people in 2009. By 2010, the number of undernourished people
worldwide had fallen to 925 million, but was still above the pre-food and fuel crisis levels of 2008. The decline in undernourishment
rates was largely due to a reduction in food and fuel prices after mid-2008 (FAO, 2010). It should also be noted that since this report
was drafted, a debate has ensued about the reliability of the assessment of the impact of the food price spikes. Recent research by
the International Food Policy Research Institute (IFPRI) has called into question the World Bank and FAO estimated impacts on hunger
and poverty. Headey (2011b) at IFPRI maintains that self-reported malnutrition data show no negative impact at all. He concludes that
economic growth more-than-compensated for any adverse effects of higher food prices. At this point, it is not possible to establish the
validity of the IFPRI findings vis-à-vis the simulation estimates presented by the World Bank and FAO, as they are currently (at the time
of writing) reviewing both their methodologies, models and the estimates presented for 2009 and 2010.


6. See General Agreement on Tariffs and Trade 1994 Article XI: General Elimination of Quantitative Restrictions. Available at: http://
www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_05_e.htm


7. The two parallel tracks are: (i) meeting the immediate food and nutritional needs of those at risk; and (ii) building longer term
resilience by eliminating the root causes of hunger and poverty.


8. For guidance on building resilience to food security at the national level, see the Updated Comprehensive Framework for Action
at: http://un-foodsecurity.org/sites/default/files/UCFA_English.pdf.


9. The coefficient of variation is a basic measure of price dispersion, which serves to compare the degree of variability from one
data series to another.


10. See: Reuters, ‘EU executive pledges curbs on commodity speculators’, 3 February 2011, at : http://www.reuters.com/
article/2011/02/02/eu-commodities-idUSLDE7110Q420110202


11. The reasons for this vary among different developing countries, for example a lack of institutions, weak infrastructure and the
difficulty of complying with increasingly stringent sanitary and phytosanitary (SPS) standards and technical barriers to trade
(TBT). UNCTAD, through its sustainability claims portal, has sought to improve farmer participation in high-value agricultural
commodity chains.


12. According to the World Bank (2008b), the demand for food imports in sub-Saharan Africa is expected to reach $100 billion by
2015 – twice the level of 2000.


13. According to food balance-sheet data (item code 2905) from FAOstat (accessed March 2012), LDC cereal production (excluding
beer) rose 36 per cent during the period 2000 to 2007. The estimated LDC cereal import dependency ratio remained unchanged
over the period, at 14 per cent.


14. Deauville Accountability Report (2011), available at: http://www.g20-g8.com/g8-g20/root/bank_objects/Rapport_G8_GB.pdf.


15. The SAPs of the IMF and World Bank list a number of budgetary and policy changes required in order for a developing country
to qualify for a loan. This conditionality typically includes reducing barriers to trade and capital flows, tax increases and cuts
in government spending.


16. However, agricultural growth associated with the Green Revolution in Asia since the 1970s has generally depended on the
availability of a properly managed water supply system, mostly irrigation. Thus, new agricultural technologies will be ineffective
without appropriate irrigation, and these facilities are very often: (a) provided by the State; (b) dependent on electricity, which
requires public investment; and (c) dependent on credit, which again may be available only as priority (State-mandated) credit.
Therefore, while it is useful to invest in R&D, for example to develop new plant varieties, a major constraint on agricultural
productive capacity may be the lack of irrigation, which requires additional public investments and interventions. In Asia, the
macroeconomic benefits from public investment in expanding irrigation and electricity are often far greater than the benefits
from public spending on fertilizer use or price support.


cHapter III: the diRect effects of the 2003-2011 commodity boom




102


COMMODITIES AND DEVELOPMENT REPORT


17. It should be noted that for some developing countries, notably LDCs and poorer countries, particular considerations and derogations
have been offered in their accession to the WTO, including special and differential treatment (SDT) in WTO agreements on goods
and services, and preferential market access. However, UNCTAD (2010) shows that special considerations have had a limited
development impact on these countries, as they have not taken advantage of these flexibilities for a variety of reasons.


18. During the period 2000–2004 taxes on agriculture in Africa (nominal rate of assistance) averaged $6 billion per annum, which
was significantly higher than public investment or foreign aid to the sector (Anderson and Masters, 2009).


19. The nine low-income countries studied were: Bolivia, Cambodia, Madagascar, Malawi, Nicaragua, Pakistan, Peru, Viet Nam, and
Zambia (Ivanic and Martin, 2008).


20. The price elasticity of poverty measures the total effect of changes in price on poverty in terms of two components: (i) is
the income effect of the change in price; and (ii) is the distribution effect captured by the price changes. It is the distribution
effect which determines whether the price changes benefit the poor proportionally more (or less) than the non-poor (Asian
Development Bank, 2008).


21. See: ASEAN (2011), 11th AMAF Plus Three Countries Conclude Agreement on Rice, at: http://www.aseansec.org/26651.htm
(accessed 21 December 2011).


22. APTERR member States are: Brunei Darussalam, Cambodia, Indonesia, the Lao People’s Democratic Republic, Malaysia, Myanmar,
the Philippines, Singapore, Thailand and Viet Nam (i.e. all the ASEAN members), plus China, Japan and the Republic of Korea.


23. Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka


24. SAARC (2007), Agreement on establishing the SAARC Food Bank; available, at: www.saarc-sec.org/userfiles/FoodBank.doc.


25. See: Associated Press of Pakistan (15 December, 2011), SAARC ministerial moot for increasing trade links in region; available
at: http://app.com.pk/en_/index.php?option=com_content&task=view&id=170413&Itemid=2.


26. See: APTERR (2010), How APTERR Works? Available at: http://www.apterr.org/index.php/how-apterr-works.


27. Angola, Botswana, Democratic Republic of the Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia,
Seychelles, South Africa, Swaziland, the United Republic of Tanzania, Zambia and Zimbabwe.


28. ECOWAS is a regional group of 15 West African countries: Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, the Gambia, Ghana,
Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo.


29. Benin, Burkina Faso, the Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Senegal, Sierra Leone and Togo.


30. This is a variant of the “virtual reserve” proposed by IFPRI.


31. It should also be noted that in February 2012, the West African Economic and Monetary Union (WAEMU) Council of Ministers
adopted a recommendation for the implementation of a regional food reserve in its economic area. The three regional institutions
(ECOWAS, WAEMU, CILSS) agreed to unify their approaches into a single regional strategy. Moreover, a high-level meeting on
food and nutrition crisis between the Member States of ECOWAS, WAEMU and CILSS held on June 4, 2012 in Lomé determined
the establishment of the regional food reserve as a priority for the end of 2012 (ECOWAS, WAEMU, CILSS, RESOGEST, 2012).


32. PR Newswire (4 August, 2011), Ukraine offers United Nations to create world grain reserve; available at: http://www.prnewswire.
com/news-releases/ukraine-offers-united-nations-to-create-world-grain-reserve-126763063.html.


33. Bloomberg (4 August, 2011). Ukraine offers to set up, manage world grain reserves for UN; available at: http://www.bloomberg.
com/news/2011-08-04/ukraine-offers-to-set-up-manage-world-grain-reserves-for-un-1-.html.


34. FNGN, La cellule grenier de sécurité alimentaire; available at: http://naam.free.fr/ALLEGE/GRENIER.htm.


35. SOS Faim (2011), Des banques de cereals aux greniers de sécurité alimentaire; available at: http://www.sosfaim.be/pdf/
publications/defis_sud/100/burkina_cereales_greniers_securite_alimentaire_defis_sud.pdf.


36. Oxfam (2011), L’utilité des Banques Céréalières au Sahel; available at: http://www.inter-reseaux.org/IMG/pdf/Presentation_
OXFAM_utilite_des_banques_cerealieres.pdf.


37. SOS Faim (2010), MOORIBEN: l’expérience d’un système de services intégrés au bénéfice des paysans nigériens; available at: http://
www.sosfaim.be/pdf/publications/dynamiques_paysannes/mooriben-au-benefice-des-paysans-nigeriens-dynamiques-
paysannes23.pdf.


38. Republic of Niger (2009), État des lieux des banques céréalières; available at: http://www.reca-niger.org/IMG/pdf/Etat_des_
lieux_des_banques_cerealieres_juin2009.pdf.


39. Republic of Mali (2006). Situation des banques de céréales; available at: http://www.csa-mali.org/docs/Situatbanquecereales_06.pdf.




103


40. Kassoum Thera (2011), Le commissaire à la sécurité alimentaire: Il faut sanctionner les mauvais gestionnaires des banques de
céréales; available at: http://www.malikounda.com/Economie/le-commissaire-a-la-securite-alimentaire-qil-faut-sanctionner-
les-mauvais-gestionnaires-des-banques-de-cerealesq.html.


41. SAARC (2007), Agreement on establishing the SAARC Food Bank; available at: www.saarc-sec.org/userfiles/FoodBank.doc (see
also Robinson, 2011).


42. Since many CDDCs’ national budgets for R&D in agriculture are small, the establishment and/or strengthening of regional
centres of excellence for agricultural research would help build critical research and financial resources to achieve economies
of scale. These could be created along the lines of agro-ecological zones or of strategic food commodities. Such centres would
need to give special attention not only to farm-level technologies, but also to post-harvest (storage, processing, and transport)
technologies and appropriate biotechnologies for food and cash crops.


cHapter III: the diRect effects of the 2003-2011 commodity boom







Chapter 4:


INDIRECT EffECTS Of ThE
RECENT COMMODITy bOOM:


STRuCTuRAL AND
fINANCIAL IMPACTS


1. Introduction ............................................................................................................................................106


2. Structural and financial effects of the commodity boom ..........................................................................106


2.1. Trends over time and by country income groups..........................................................................106


3. Commodity growth exposure and its consequences ...............................................................................109


3.1. Measuring commodity growth exposure ......................................................................................109


3.2. Exploring the consequences of commodity growth exposure ......................................................110


3.3. Econometric analysis ..................................................................................................................114


4. Commodity dependence in the context of finance-driven globalization ....................................................118


4.1. Commoditydependence,internationalfinanceandgrowth:lessonslearned ................................118


4.2. ForeigndirectinvestmentbyfirmsandStates ............................................................................123


5. Land acquisition as a category of FDI in the commodities sector .............................................................124


6. Policy implications .................................................................................................................................126


References .........................................................................................................................................................128




106


COMMODITIES AND DEVELOPMENT REPORT


1. INTRODuCTION
The recent commodity boom had both positive and
negative indirect effects on commodity-dependent
developing countries. On the positive side, it could
be argued that the boom attracted FDI and other
capital inflows, which spilled over into economic
diversification and domestic financial development.
On the negative side, the rising food and fuel prices
may have inhibited diversification. The boom may
also have increased the volatility of commodity pric-
es by attracting speculative investment. This chapter
shows that the imperative to “build financial capital”
identified by Kregel (2004) – i.e. to safeguard stabil-
ity in international financial relations – meant that
revenues from commodity exports (along with other
inflows) were mainly used by countries to strengthen
their international financial positions through the ac-
cumulation of stocks of foreign assets and a reduc-
tion of their foreign liabilities, notably debt.


While recognizing that it takes time for sectoral
booms to translate into broader growth, and that
rising inequality is often a by-product of growth,
the above contrasting effects illustrate some of the
issues that have surfaced as a result of the recent
commodity price boom. This chapter offers an ev-
idence-based assessment of these issues by trac-
ing the indirect effects of the commodity price boom
through a review of the empirical literature and by
analysing a data set specifically constructed for this
purpose.


This chapter is structured as follows. In Section
2, the diversification and development effects of
the recent commodity boom, are considered using
variables for the real sectors (e.g. the respective
shares of manufacturing and services in GDP and
in gross capital formation1) and key social indica-
tors (e.g. health and education). Section 3 seeks to
analyse the impacts of the commodity price boom
on developing countries empirically, using data for
142 developing countries (both commodity-depend-
ent and others) over the period 1995–2009. This
is followed by an estimation of the impacts of the
price boom based on an econometric model using
a specially constructed data set. The model does
not disaggregate the data or introduce dummy vari-
ables according to type of economy (e.g. small island
State, landlocked country, least developed country)
or export specialization (mineral, metal, oil or non-
oil exporter), as this was beyond the scope of this
report.2 The estimated weighted least squares model
reflects grouped data with known group sizes and
heteroskedasticity3 to obtain unbiased estimates.
Section 4 discusses commodity dependence in the
context of finance-driven globalization, and analyses
FDI and strategic investment in natural resources.
The high prices of natural resources may have stim-
ulated FDI, especially in resource-rich economies,


and particularly in land acquisitions. Section 5 re-
views specific research about the contentious and
topical issue concerning the acquisition of land as a
category of FDI, also known as “land grabs”. Finally,
section 6 presents some policy implications.


2. STRuCTuRAL AND
fINANCIAL EffECTS Of
ThE COMMODITy bOOM


In this section, a data set containing variables that
capture the three perspectives outlined in chapter 2
is utilized. The diversification and development ef-
fects are derived from real-sector variables, includ-
ing the shares of the manufacturing and services
sectors in GDP and gross capital formation; devel-
opment effects are observable in social indicators,
both input measures (e.g. health expenditures) and
outcomes (infant mortality and life expectancy).
Resource curse effects are reflected in interest
and exchange rates, the increased share of com-
modities in exports, increased commodity depend-
ence and possible crowding out of manufacturing
and services development (“de-diversification”/
increased concentration of exports). Financial sec-
tor effects of foreign currency inflows can be seen
from increases in CDDCs’ growing international fi-
nancial investments (a rise in foreign assets and
a fall in liabilities – especially a decline in debt –
and rising capital inflows, typically in the form of
FDI), often at the cost of domestic financial devel-
opment (evident in declining credit-to-GDP ratios)
and financial deepening. Section 3 presents a more
rigorous exploration of the three perspectives us-
ing a full panel data set for panel data regression
analyses.


The data from the World Bank’s World Develop-
ment Indicators (WDI)4 database are combined with
indicators of commodity earnings taken from the
UNCTADstat database. The sample of 142 low- and
middle-income countries and the time frame/period
of 1995 to 2009 have been selected on the basis
of data availability and relevance to the resource
boom.5


In this section, these data are analysed in two ways:
(i) trends over time and across various levels of de-
velopment; and (ii) trends across categories of coun-
tries defined by their growth in commodity exports
and degree of commodity dependence.


2.1. Trends over time and by
country income groups


To set the scene, the four figures below show de-
velopments of the real and financial sectors in the
sample of 142 low- and middle-income countries
over the period 1995–2009 based on key variables
using unweighted sample averages.6


The recent
commodity boom
had both positive


and negative
indirect effects


on CDDCs.
On the positive
side, the boom


attracted FDI
and other capital


inflows. On the
negative side, the


rising food and
fuel prices may
have inhibited
diversification.




107


cHapter IV: indiRect effects of the Recent commodity boom


Figure 4.1 shows growth rates of value added in man-
ufacturing and services from 1995–1996 to 2009.
After 2004, manufacturing growth decoupled from
services growth, which was growing at more than
one percentage point higher during the period. This is
compatible with the commodity boom, which stimu-
lates services (non-tradables) more than manufactur-
ing activity. For this sample period, what resembles
a structural break8 is observed after 2002-2003. This
observation is explored further in the analysis below.


For each of the years 1995–2009, each country in
the sample is classified into one of five quintiles ac-
cording to GDP per capita levels.9 The observations
on trends in structural transformation presented in


Figure 4.1 appear to persist across income levels.
Comparing these variables for the richest quintile in
the sample with the poorest quintile, the observed
differences are negligible. Social indicators were also
observed to be trending upwards during this time pe-
riod. Countries in the sample increased their share of
total expenditure on health and education, with no-
ticeable gains in health and longevity: life expectancy
rose from 62 to 65 years, on average. This was largely
driven by reductions in mortality rates of infants and
children under 5 years old (not shown). Figure 4.2
shows that increased longevity and high levels of ex-
penditure on education occurred mainly in the poorest
countries, and generally there were large differences
in social expenditure patterns across income quintiles.


Between 2004
and 2009
manufacturing
growth
decoupled
from services
growth, which
was growing at
more than one
percentage point
higher.


Figure 4.1. Structural transformation: rates of growth of value added in manufacturing
and services, 1996–2009 (per cent)


Figure 4.2. Changes in life expectancy and spending on health and education, by income
quintiles, 1995–2009 average


-2


0


2


4


6


8


10


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


An
nu


al
g


ro
w


th
ra


te
(%


)


Services value added Manufacturing value added


-0.1


-0.05


0


0.05


0.1


0.15


0.2


0.25


0.3


0.35


0.4


Poorest 2 3 4 Richest


Ch
an


ge
in


e
xp


en
di


tu
re


/G
DP


ra
tio


a
nd


li
fe


e
xp


ec
ta


nc
y


Life expectancy* Education expenditure/GDP ratio Health expenditure/GDP ratio


Income quintiles


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.
Note: The data show year-on-year growth rates, with calculations based on value added data in current dollars.


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.
Note: Regarding life expectancy, the change is not in per cent, but in years. Thus, people in the countries in


the sample gained, on average, about a quarter of a year for each year during the period1995–2009
(this means they gained on average 0.25*14 = 3.7 years over 1995-2009). It denotes the percentage
change in life expectancy, which is measured in years.


The poorest
countries in the
sample increased
their share of
total expenditure
on health and
education.




108


COMMODITIES AND DEVELOPMENT REPORT


Domestic financial development was characterized
by growth of both money and credit aggregates
relative to GDP, especially after 2003, and by a stock
market boom (in the 70 countries in the sample that
have an active stock exchange) from 2002 (Figure
4.3). This was coupled with a reversal and then a
rise in the GDP deflator (one measure of inflation)10
after 2002, and an ongoing decline in nominal inter-
est rates, from 18 per cent to 6 per cent, on average.
Overall, the commodity boom period of 2003–2009
also saw monetary expansion, financial deepen-
ing and rising inflationary pressures. These general


trends may be observed across all countries in the
different income quintiles, but at very different lev-
els. For example, there was only 25 per cent stock
market capitalization in 2009 in the poorest quintile
of the economies in the sample.


Regarding trends in CDDCs’ foreign financial posi-
tions (Figure 4.4), there were large debt reductions
after 2002, but mainly in the poorer countries, possi-
bly as part of conditionalities of the Heavily Indebted
Poor Countries (HIPC) Debt Relief initiative of the
IMF and World Bank and the Multilateral Debt Re-
lief Initiative (MDRI).11 The debt levels of the richest


Regarding trends
in CDDCs’ foreign
financial positions


there were large
debt reductions
after 2002, but


mainly in the
poorest countries.


Figure 4.3. Trends in indicators of domestic financial development, 1995–2009


Figure 4.4. Trends in foreign financial positions and exchange rates, 1995–2009


0


20


40


60


80


100


120


140


160


0


5


10


15


20


25


30


35


40


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


GD
P


de
fla


to
r:


in
de


x
(2


00
0


=
10


0)


Pe
r c


en
t


Credit /GDP M2/GDP
Stockmarket capitalization/GDP Nominal interest rate
GDP deflator, right axis


0


20


40


60


80


100


120


140


0


10


20


30


40


50


60


70


80


90


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


Ex
ch


an
ge


ra
te


re
la


tiv
e


to
its


v
al


ue
in


2
00


5
=


10
0


Sh
ar


es
in


G
DP


(%
)


Foreign liabilities/GDP


Foreign assets/GDP


FDI/GDP


Debt/GNI, right axis


Real effective exchange rate (2005=100), right axis


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.
Note: The figure comprises the 70 countries in the sample that have a stock exchange. M2 is a measure of the


quantity of money in circulation (including cash and currency, savings deposits and non-money market
funds). Credit refers to bank credit to the private sector.


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.


Domestic financial
development was


characterized
by growth of


both money and
credit aggregates


relative to GDP
after 2003, and


by a stock market
boom from 2002.




109


cHapter IV: indiRect effects of the Recent commodity boom


quintile of countries rose until 2002, and, stabilized
until 2009.12 Debt service flows, and the consequent
demand for dollars also appear to have governed
movements in poor countries’ real effective ex-
change rates (REERs),13 the estimated correlation
being 32 per cent in the lowest quintile but an insig-
nificant -6 per cent in the richest quintile. This also
appears to be the case for foreign liabilities more
generally. Foreign asset accumulation for the sample
followed the same upward trend, rising from 7.7 per
cent in 1995 to 24 per cent of GDP in 2009.14 REERs
rose between 1995 to 1997 and then declined until
2007, rising moderately thereafter. FDI as a share of
GDP rose from a sample average of 2.8 per cent in
1995 to 5.1 per cent in 2009.15


3. COMMODITy gROwTh
ExPOSuRE AND ITS
CONSEquENCES


3.1. Measuring commodity
growth exposure


In order to establish to what extent the above varia-
bles and other observable trends in CDDCs could be
ascribed to the effects of the commodity price boom,
the Report creates a measure of countries’ exposure
to growth in commodity revenues based on the level
of their commodity dependence and the extent of
their growth in commodity revenues. This variable
is termed “commodity growth exposure”. This sec-
tion aims to capture both dimensions of commodity
growth exposure:


(i) The extent to which a country is experiencing
growth in its commodity revenues (measured by
annual percentage change); and


(ii) The extent of a country’s dependence on com-
modities (measured by the share of commodity
revenues in total export earnings).


Both are important, and excluding either dimen-
sion would paint a misleading picture of the level
of exposure to growth in commodity revenues. For
instance, in the sample, countries such as Nigeria
are observed to have a high but fairly stable (or
even declining) level of commodity dependence.
Using only the (low) growth in commodity revenues
to measure its exposure to the commodity boom
would erroneously classify Nigeria as not having
been affected by that boom. On the other hand,
countries such as China experienced very rapid
year-on-year growth rates in commodity earn-
ings, but displayed very low levels of commodity
dependence. Therefore, using growth in commod-
ity revenues to measure its exposure to the com-
modity boom would erroneously classify China as
a major beneficiary of that boom. Similarly, using
only commodity dependence as a measure would


ignore price dynamics. In view of these consid-
erations, a measure of a country’s exposure to the
commodity boom that captures both commodity
dependence and growth in commodity revenues
was constructed in three steps:


1. First, for each of the 142 countries and for each
year of the 1995–2009 period, the year-on-year
growth rates in commodity revenues as well as
the share of the increase in commodity revenues
of the previous year were calculated. There were
1,404 observations. As expected, because of
low base year values these year-on-year growth
rates vary greatly, between –821 per cent and
+193 per cent.


2. Secondly, this percentage growth was multiplied
by the country’s commodity dependence (de-
fined as commodity revenues as a percentage of
total exports in that year). In this sample, com-
modity dependence varies between 2.5 per cent
and 100 per cent.


3. The product obtained in step 2 is a variable that
is specific to each country and each year (but
with a few gaps in the time series),16 and it re-
flects both commodity dependence and growth
in commodity revenues.


There were 1,932 observations, which varied be-
tween -60 and +626, with 694 negative values. It
is clear from the bivariate correlation coefficient of
1.7 per cent that the new variable effectively cap-
tures two very different dimensions: commodity
dependence and growth in commodity revenues.
This new variable is termed “commodity growth
exposure,”17 which is very closely linked to growth
in commodity revenues, their correlation coefficient
being 84  per cent. Importantly, it should be noted
that this measure is designed to study the structural
and financial effects, but not the demand-side ef-
fects, on food prices and poverty, which were dis-
cussed in chapter 3.


Appendix 1 presents the new variables of “commod-
ity growth exposure” and its components, namely
commodity dependence and growth in commodity
revenues, for all the countries in the sample, with
totals averaged over time.18 For instance, countries
with very high commodity growth exposure, on av-
erage, include Azerbaijan, Chad, Iraq and Sudan;
countries with very low commodity growth exposure
include Bangladesh, Cambodia, China and the Philip-
pines. Even within this sample of low- and middle-
income countries, the price boom was more impor-
tant for the poorer countries, as they show higher
scores on the commodity growth exposure index
(Figure 4.5). This is understandable, as their econo-
mies tend to be less diversified, and their share of
commodities in total exports tends to be compara-
tively larger.


Foreign asset
accumulation for
the sample rose
from 7.7 per cent
in 1995 to 24 per
cent of GDP in
2009.


The “commodity
growth
exposure” of a
specific country
captures both
its commodity
dependence
and the growth
in its commodity
revenues.




110


COMMODITIES AND DEVELOPMENT REPORT


3.2. Exploring the
consequences of
commodity growth
exposure


The effects of larger commodity growth exposure in
the sense defined above are explored in this section
through a series of graphs. This is based on unweight-
ed averages of the sample of 142 low- and middle-
income countries over the period 1995–2009. Also
shown are how trends have differed across income
groups, categorized into five quintiles based on per
capita GDP levels. Focusing on the average for the
1995–2009 period means that the analysis does not
initially consider two sub-periods (1995–2002 and
2003–2009) that suggest a structural break around


2002 in several of the trends presented above. In
order to avoid a profusion of graphs, the analysis by
sub-periods is included, instead, in the econometric
analysis below (see section 3.3).


In Figure 4.6, countries are grouped into deciles
based on increasing values of the commodity growth
exposure variable. It shows that, with the exception
of the lowest decile, greater commodity inflows were
positive for per capita income growth in constant,
PPP-corrected dollars. This is not solely due to ris-
ing prices in the primary sector, which by definition
will increase GDP growth. It is also due to the fact
that commodity growth exposure correlates posi-
tively with annual growth rates of value added (in
current terms) in the non-primary sectors, as well as
to growth of inward investment.


Figure 4.5. Commodity growth exposure by income quintiles, 1995–2009 average


Figure 4.6. Commodity growth exposure and growth of non-primary sectors and investment,
by decile, 1995–2009 (Average annual percentage growth rate)


0


10


20


30


40


50


60


70


80


Poorest 2 3 4 Richest


Pe
r c


en
t


Commodity growth exposure Growth in commodity revenues Share of commodities in total export revenues


-2


0


2


4


6


8


10


12


14


16


Lowest 2 3 4 5 6 7 8 9 Highest


Av
er


ag
e


an
nu


al
g


ro
w


th
ra


te
(%


)


Deciles of increasing commodity growth exposure
Manufacturing value added Services value added
Gross fixed capital formation GDP per capita (constant, PPP-corrected $)


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.
Note: Income quintiles are annually defined on the basis of GDP per capita in PPP-corrected constant dollars.


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.


With the
exception of


the lowest
decile in the


sample, greater
commodity


inflows were
positive for per
capita income


growth.




111


cHapter IV: indiRect effects of the Recent commodity boom


During this period, as the commodity sector grew
faster than the secondary and tertiary sectors, the
shares of services and (especially) manufacturing
in total GDP tended to decline with greater com-
modity growth exposure (Figure 4.7). This is to be
expected, as structural transformation is a slower
process than price increases. Therefore changes
in sectoral shares are unlikely to keep up with
high value-added growth in the commodity sec-
tor due to booming prices. Figure 4.7 shows that
the share of services in GDP did not decline with
increasing commodity growth exposure, whereas
that of manufacturing did. Again, this is under-
standable: an increase in commodity revenues
fuels domestic demand for services (which are
not tradable) more strongly than for domestic
manufactures.


These falling shares of the non-primary sectors
do not necessarily suggest a process of dein-
dustrialization. Figure 4.7 shows that greater
commodity growth exposure does not correlate
negatively with an increase in investment shares
(the share of GDP devoted to gross capital forma-
tion), which drive structural transformation in the
long run. However, the relationship is rather am-
biguous, as further exploration (not shown here)
suggests that the correlation between commodity
growth exposure and the share of GDP devoted
to gross capital formation is clearest in the more
developed economies, but is entirely absent in
the poorer economies in the sample. This is fur-
ther developed through a more rigorous analysis
below.


A preliminary conclusion from this exploration is
that beyond a low threshold of commodity growth
exposure (after the third decile), higher revenues
from commodity exports may be positive for growth
(Figure 4.6) and investment, but not for diversifica-
tion in the short run. As diversification tends to be
a long-term process, the question of whether rev-
enues from commodity exports are a source of sup-
port or a barrier to structural transformation cannot
be conclusively established from available data and
the time frame used here. However, the tendency for
those revenues to boost investment shares is a posi-
tive indicator.


Figure 4.8 suggests that commodity growth expo-
sure did not stimulate domestic financial deepening.
Both money and credit, as a percentage of GDP, fell
with increasing deciles of commodity growth expo-
sure. This is also true for stock market capitaliza-
tion (though this is only of relevance for 70 of the
sampled countries that have stock markets). The
growth rate of the share of credit in GDP (not shown
here) has varied in relation to commodity growth
exposure, but without a clear trend. Although inter-
est rates were stagnant, greater commodity growth
exposure appears to have slightly increased infla-
tionary pressure, with rising GDP deflators. Countries
with greater commodity growth exposure were also,
possibly, larger importers. Each of these trends was
observable both in the lower and the higher income
deciles in the sample.


Despite rising GDP deflators, there appears to be lit-
tle evidence of exchange rate pressures related to


Figure 4.7. Average annual commodity growth exposure and structural transformation,
by decile, 1995–2009 average


-1


-0.5


0


0.5


1


1.5


2


Lowest 2 3 4 5 6 7 8 9 HighestAv
er


ag
e


an
nu


al
c


ha
ng


e
(p


er
ce


nt
ag


e
p


oi
nt


s)


Deciles of increasing commodity growth exposure


Gross fixed capital formation/GDP Manufacturing value added/GDP
Services value added/GDP


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.
Note: The figure shows the average change in the GDP shares of services, manufacturing and gross


capital formation in percentage points. Thus, if the services/GDP ratio moved from 0.23 to 0.37 over
the period 1995–2009 (14 annual change observations), the average annual change in the GDP
shares of services is 1 (that is, 37-23/14).


During 1995-
2009, the shares
of services and
manufacturing in
total GDP tended
to decline with
greater commodity
growth exposure.
However, the
falling shares
of non-primary
sectors do not
necessarily
suggest a
process of
deindustrialization.


Commodity
growth exposure
did not stimulate
domestic financial
deepening. Both
money and credit,
as a percentage
of GDP, fell with
increasing deciles
of commodity
growth exposure.




112


COMMODITIES AND DEVELOPMENT REPORT


the Dutch disease phenomenon. REERs were flat
over increasing deciles of the commodity growth
exposure index. Also, the annual percentage
change in nominal exchange rates appears to have
been low and stable in countries with high com-
modity growth exposure, and higher in countries
with lower commodity growth exposure (Figure
4.9). This suggests that countries with less com-
modity growth exposure are more vulnerable to
Dutch disease effects.


This is particularly interesting in view of the many
discussions of the Dutch disease effects of rev-
enues from commodity exports, and is possibly as-
sociated with the build-up of foreign assets and the
decline of liabilities. Both foreign assets and debt
liability trends are quite volatile, but the trends sug-
gest that they tend to be larger in countries with
greater commodity growth exposure. Revenues
from commodity exports appear to have been in-
creasingly channelled to international financial
markets, which may have prevented them from
increasing domestic inflationary and exchange rate
pressures.


To further elaborate, in Table 4.1, economies in the
top two income quintiles are presented separately for
the periods 1995–2002 and 2003–2009. This is mo-
tivated by the suggested structural break in the time
series observed above, and by background knowl-
edge of changes in international financial markets
and of the growth of sovereign wealth funds (SWFs)
after the early 2000s (Devlin and Brummitt, 2007).
After 2002, higher commodity growth exposure ap-
pears to have been linked to a greater accumulation
of foreign assets and to smaller real (and no nomi-
nal) appreciations (Figure 4.10). This finding again
suggests that in the more developed commodity-
dependent economies, foreign asset accumulation


prevented currency appreciations associated with
Dutch disease after 2003. In the poorer economies,
this association was not observed.


Finally, the effects of commodity growth exposure
on social indicators were explored. Countries with
high exposure tended to spend less on health and
education as a share of their GDP (Figure 4.11).19
These trends may be interpreted as a sign of the
natural resource curse, as Frankel (2010) and Gyl-
fason (2001) suggest. However, these are input
measures, not health outcomes. There appears to
have been no negative effect of commodity growth
exposure on life expectancy, the leading health
outcome measure, or on infant mortality rates, its
principal driver.


This could partly be explained by the prevailing
development paradigm of the 1990s and 2000s,
which focused on the MDGs and thus promoted
investment in the social sectors, especially health
and education, with little emphasis on investment
in the productive sectors (i.e. agriculture and in-
dustry) particularly for the low-income CDDCs.
Commodity-dependent countries’ patterns of ex-
penditure and sectoral growth tended not to follow
the conditionalities attached, for example, to struc-
tural adjustment programmes, or the HIPC initia-
tive, such as the poverty reduction strategy papers
(PRSPs) of developed-country donors and interna-
tional financial institutions (IFIs), perhaps because
most of them (excluding the HIPCs) enjoyed greater
fiscal autonomy. However, their health outcomes
were improved as they added more years to the life
expectancy of their populations than did countries
which did not benefit greatly from the commodity
boom.


In summary, a “commodity growth exposure” vari-
able was constructed which reflects both commod-


Figure 4.8. Commodity growth exposure and domestic financial development, 1995–2009 average


0


20


40


60


80


100


120


140


0


10


20


30


40


50


60


Lowest 2 3 4 5 6 7 8 9 Highest


GD
P


de
fla


to
r i


nd
ex


(2
00


0=
10


0)


Sh
ar


es
a


nd
in


te
re


st
ra


te
s


(%
)


Deciles of increasing commodity growth exposure


Credit /GDP M2/GDP Nominal interest rate GDP deflator, right axis


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.


Despite rising
GDP deflators,


there appears to
be little evidence


of exchange
rate pressures
related to the


Dutch disease
phenomenon.


There appears
to have been


no negative
effect of greater


commodity
growth


exposure on
life expectancy,


or on infant
mortality rates.


This could partly
be explained
by the focus


on the MDGs
which promoted


investment in
social sectors.




113


cHapter IV: indiRect effects of the Recent commodity boom


Figure 4.9. Commodity revenues and foreign financial positions, by decile, 1995–2009 average


50


100


150


200


250


300


350


Lowest 2 3 4 5 6 7 8 9 Highest


A. Foreign liabilities


Foreign liabilities/GDP Debt/GNI Real effective exchange rate, 2005=100


Pe
r


ce
nt


0


2


4


6


8


10


12


14


Lowest 2 3 4 5 6 7 8 9 Highest


B. Foreign assets


Foreign assets/GDP FDI/GDP Percentage change in nominal exchange rates


Pe
r


ce
nt


Sources: UNCTAD secretariat calculations, based on UNCTADstat and World Bank, World Development
Indicators database.


Notes: The numbers on the axes are all ratios expressed in per cent; thus, in chart A, debt is between 1
and 1.5 times the gross national income (GNI), which means that the value for the debt/GDP ratio in
percentage terms is between (roughly) 100 and 150 per cent. The REER is also a ratio: a value relative
to its value in 2005 times 100. The break in the series for foreign liabilities/GDP and foreign assets/
GDP is due to a lack of data for countries in the third decile.


ity dependence and growth in commodity revenues
(with a 0.84 correlation to the latter). Across increas-
ing deciles of commodity growth exposure, indica-
tors for income growth, structural transformation,
domestic financial development, foreign financial
positions and exchange rates, and social indicators
have been discussed. The findings from the above
analysis may be summarized as follows:


First, greater commodity growth exposure appears
to have been positive for per capita income growth
(in constant, PPP-corrected dollar terms) and for
value-added growth in the non-primary sectors (Fig-
ure 4.6). However, it does not appear to have been
clearly related to growth in investment and in invest-
ment shares, as a growth-and-investment premium
from commodity growth exposure was not observed
for the poorer economies.


Second, regarding the shares of money, credit and
stock market capitalization in GDP, which are indi-
cators of domestic financial deepening the analysis
suggests that these shares were lower with greater
commodity growth exposure. However, there was a
slight increase in inflationary pressure, as reflected
in rising GDP deflators.


Third, REERs were stagnant, with changes in nomi-
nal exchange rates falling over increasing deciles of
the commodity growth exposure index. This suggests
that there is little evidence of Dutch disease-induced
exchange rate pressures due to the commodity boom,
particularly in countries with high commodity growth
exposure. This could be connected to larger build-ups
of foreign assets and larger declines in liabilities, es-
pecially in the higher income quintiles in the sample.
This trend was especially pronounced in the 2000s.




114


COMMODITIES AND DEVELOPMENT REPORT


Finally, the analysis shows that countries with greater
commodity growth exposure tended to spend less on
health and education as a share of their GDP. However,
there appears to be no negative correlation between
commodity growth exposure and life expectancy, the
leading health outcome measure, or on infant mortal-
ity rates, its principal short-term driver.


3.3. Econometric analysis


The above observations and findings guide the panel
data regression analyses below, where the depend-
ent variable of interest is regressed against a coun-
try’s commodity growth exposure and other control
variables. The control variables were estimated each


Figure 4.10. Asset accumulation and appreciation of the top two income quintiles before and
after 2002


Figure 4.11. Commodity revenues and social indicators, all deciles, 1995–2009 average


0


20


40


60


80


100


120


140


-5


0


5


10


15


20


25


30


Lowest 2 3 4 5 6 7 8 9 Highest


Re
al


e
ffe


ct
iv


e
ex


ch
an


ge
ra


te
s


(2
00


5
=


10
0)


Pe
r c


en
t


Deciles of increasing commodity growth exposure


Foreign assets/GDP (2003-2009)
Foreign assets/GDP (1995-2002)
Percentage change in nominal exchange rate (2003-2009)
Percentage change in nominal exchange rate (1995-2002)
Real effective exchange rate, 2005=100 (2003-2009, right axis)
Real effective exchange rate, 2005=100 (1995-2002, right axis)


-1.6


-1.4


-1.2


-1


-0.8


-0.6


-0.4


-0.2


0


-0.15


-0.1


-0.05


0


0.05


0.1


0.15


0.2


0.25


0.3


0.35


Lowest 2 3 4 5 6 7 8 9 Highest


In
fa


nt
m


or
ta


lit
y


pe
r 1


,0
00


Av
er


ag
e


an
nu


al
c


ha
ng


e
in


G
DP


s
ha


re
s


(p
er


ce
nt


ag
e


po
in


ts
)


Deciles of increasing commodity growth exposure


Life expectancy* Health expenditure/GDP
Education expenditure/GDP Infant mortality (/1000), right axis


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.


Source: UNCTAD secretariat calculations, based on World Bank, World Development Indicators database.
Note: Changes in life expectancy are expressed in years, not in  per cent. Thus, people in the countries


in the sample gained, on average, about a quarter of a year in each year during the period 1995–
2009 (meaning they gained, on average, 0.25*14 = 3.7 years over that period). Thus it denotes
the percentage change in life expectancy, which is measured in years. Infant mortality per
1,000 refers to the change in the infant and under-5 mortality rate.


Countries
with greater
commodity


growth exposure
tended to spend


less on health
and education as


a share of their
GDP.




115


cHapter IV: indiRect effects of the Recent commodity boom


time with another dependent variable of interest in
order to study the effect of commodity growth expo-
sure on income growth, investment, diversification,
domestic financial development, foreign financial
positions and social indicators. All estimations as-
sumed country-specific heteroskedasticity of the
error terms.


The effect of commodity growth exposure is moder-
ated by a large number of other variables, many of
which are included as control variables (Table 4.1).
The control variables included reflect the following:


– Development level and growth, captured by the
level and growth of GDP per capita, in constant
PPP-corrected dollar terms.


– Human capital, captured by life expectancy,
health and education expenditure.20


– Economic structure, captured by the value-add-
ed shares of the non-primary sectors in GDP and
investment shares in GDP.


– Monetary policy, captured by the interest rate,
credit and money stocks, and foreign debt as a
share of GNI.


– International trade and investment conditions,
captured by exchange rates and net FDI as a
share of GDP.


– The value of net food imports (or exports) as a
share of GDP.


To demonstrate how control variables matter, ap-
pendix 2 shows the regression of economic growth
(measured as the percentage increase in GDP per
capita) on commodity growth exposure with and with-
out a varying set of control variables. Perhaps unsur-
prisingly, the positive effect of commodity growth ex-
posure on the percentage increase in GDP per capita
is robust for all these variables. The size of the coef-
ficient increases with more control variables added,
which is better for approximating its real value. The
evidence, then, is that commodity growth exposure
has a stimulating effect on growth in GDP per capita.


There appear to be a number of interconnected
changes concerning the effects of commodity
growth exposure emerging from this analysis (Table
4.1). These are related to changes in international
financial governance since the 2000s, which had a
differential impact on the CDDCs, depending upon
whether they were low- or middle-income countries.
As Nissanke (2010) notes, in order to avoid a repeti-
tion of the transmission effects of the 2009 financial
crisis spilling over into world trade and real econom-
ic activities, it is necessary to reform international
financial governance structures that oversee the glo-
balization process as well as international regimes
affecting world commodity markets and trade. This
suggests that the mandates, policies and gover-


nance of IFIs, including the IMF, beyond the system
of financial regulation and supervision, require ur-
gent reform.21


Over the past decade, financial globalization has ac-
celerated. The view that international financial flows
and investments are beneficial has been gaining
increasing support (e.g. Das, 2006), and developing
countries have been encouraged by IFIs to devote
more of their resources to strengthening their in-
ternational financial positions. For instance, SWFs22
(or non-renewable resource funds) began expanding
to unprecedented levels. For CDDCs, the growth of
SWFs may reflect a general policy stance that gives
importance to the accumulation of reserves and
investments in international financial markets (UN-
DESA 2010; Kregel, 2004).


Comparing the periods 1995–2002 and 2003–2009
– the latter constituting a period of finance-driven
globalization – revenues from commodity exports
may have supported foreign financial investments
after 2002, and were less correlated with domes-
tic economic growth, diversification and domestic
financial development. This is the case mainly for
poorer developing countries, which traditionally ad-
here closely to the policy prescriptions of IFIs (e.g.
IMF and World Bank), and their creditors and inves-
tors have displayed a preference for greater foreign
financial investments. Thus, the impact of commod-
ity exposure appears to have changed around the
early 2000s, primarily in the poorer countries. These
trends are not observable in the higher quintile
(mainly middle-income) developing countries in the
sample, which in general tend to exercise greater
autonomy in policy-making (Wade, 2009). Clearly,
the reason for this collective change in the poorer
countries is not only related to country specifics
(captured in the control variables); it may also be due
to this group of countries encountering a significant-
ly changed international financial environment. This
finance-driven globalization perspective is explored
in greater depth in the next section.


There are considerable differences in the effects
over time and over income levels. The main results
of the econometric analysis presented in Table 4.1
are summarized below.


1. Change in foreign financial assets as a share of
GDP


For the 40  per cent of poorer countries in the
sample, greater commodity growth exposure
was not associated with greater foreign financial
investments in 1995–2002. However, during the
subsequent period, 2003–2009, revenues from
commodity exports appear to have been used to
support investments in the international financial
markets. In the 60 per cent of richer countries in
the sample, although this positive link between


During the boom,
revenues from
commodity
exports appear
to have been
used to support
investments in
the international
financial markets.




116


COMMODITIES AND DEVELOPMENT REPORT


Table 4.1. Effects of greater commodity growth exposure over time, by income group,
1995–2002 and 2003–2009


Period 1995–2002 2003–2009


Country groups
(by income group)


Bottom
40 per cent


Top
60 per cent


Bottom
40 per cent


Top
60 per cent


The effect of higher commodity
growth exposure on: (coefficients)


a


1. Foreign financial assets/GDP ratio (change) -0.043 0.042*** 0.093*** -0.007


0.033 0.013 0.026 0.008


2. Foreign debt/GDP ratio 0.244 -0.071 -0.169 0.195***


0.161 0.076 0.151 0.038


2. Natural logarithm (ln) of debt service/GDP ratio -0.004 0 0.007* -0.001


0.004 0.001 0.004 0.001


3. Growth rate of GDP per capita (%) 0.982** 1.076 0.084 4.282***


0.426 0.704 0.191 0.756


4. Domestic credit/GDP ratio b -0.007 -0.043 -0.01 0.164**


0.009 0.082 0.016 0.067


4. M2c/GDP ratio -0.011 -0.01 -0.01 0.131*


0.03 0.045 0.021 0.072


5. Growth in health expenditure (%) d 0.184** 0.008 0.174** 0.067**


0.091 0.053 0.079 0.026


5. Growth in educational expenditure (%) d -0.428*** -0.303*** -0.942*** -0.06


0.069 0.068 0.212 0.037


6. Value-added growth of manufacturing and
services/GDP ratio (%) d -0.018*** -0.052*** -0.004 -0.023***


0.007 0.008 0.016 0.006


7. lne of gross capital formation/GDP 0 0 0.003*** 0


0.002 0.001 0.001 0


8. REER 0.085 -0.146*** 0.021 0.003


0.134 0.049 0.054 0.021


8. REER (year-on-year change) 0.092 -0.057** 0.157*** 0.002


0.068 0.024 0.053 0.009


9. FDI/GDP ratio (year-on-year change) -0.023** -0.031*** 0.008 -0.011


0.009 0.007 0.014 0.007


Sources: UNCTAD secretariat calculations, based on UNCTADstat and World Bank WDI database.
Notes: It should be noted that the set of control variables is similar, but not identical, over models – e.g. FDI is a


control variable in all the models except where it is the dependent variable, and M2 is not included in the
set of control variables for domestic credit due to multicollinearity. By allowing, for example, the FDI/GDP
ratio to be both the dependent variable in one equation and a control variable in other regressions, it is
acknowledged that the set of variables studied here are both influencing and influenced by each other.


a One, two and three asterisks indicate a coefficient’s statistical significance for p=0.1, p=0.05 and p=0.01,
respectively. All models are estimated assuming panel-specific heteroskedasticity. Standard errors are in italics.


b Domestic credit is the stock of loans by domestic deposit-taking institutions to the domestic non-financial
sector.


c ‘M2’ is a measure for the money stock, including currency in circulation, deposits (overnight, time-related
time-related deposits and savings), and non-institutional money market funds.


d Growth rates in spending on health and education are in current dollars. Growth rates of the manufacturing
and services sectors refer to value-added growth in current dollars.


e ‘ln’ Indicates the natural logarithm.




117


cHapter IV: indiRect effects of the Recent commodity boom


commodity export revenues and foreign assets
was present in 1995–2002, it was not evident
during the period 2003–2009 (see appendix 2,
table1 for full model specifications).


2. Foreign debt and debt service as a share of GDP


For the 40  per cent of poorer countries the
results are statistically inconclusive, although
these countries may have used their commodi-
ty revenues to strengthen their foreign financial
positions and prevent their foreign debt levels
(as a share of GDP) from rising in 2003–2009.
This had not been the case during the earlier
period, 1995–2002. The richer countries, on
the other hand, increased their debt levels with
greater commodity growth exposure in 2003–
2009 – not just nominally but also as a share of
GDP, despite often high GDP growth rates.


3. Growth rate of GDP per capita


As a result of their greater use of commodity
revenues for debt reductions and foreign invest-
ments, for the 40 per cent of poorer countries
commodity growth exposure in 2003–2009 was
not correlated with income growth. This was in
contrast to the 1995–2002 period and in con-
trast with the richer countries’ experience in
2003–2009. The income growth effect of com-
modity growth exposure quadrupled in the richer
countries between the two periods but was not
evident (in terms of statistical significance) in
the poorest 40 per cent.


4. Domestic credit as a share of GDP and M2 as a
share of GDP


Equally, the richer countries (but not the
40  per cent of poorer countries) experienced
an increase in domestic financial development
(measured by their credit/GDP and M2/GDP ra-
tios) with greater commodity growth exposure
during the 2003–2009 boom period.


5. Expenditures on health and education


The poorer countries with greater commod-
ity growth exposure spent more on health than
on education in 1995–2002. These correlations
persisted throughout the period 2003–2009. It
is possible that they were spending more on
foreign financial investment at the cost of do-
mestic social spending, in particular education.
In middle-income countries the correlations
were much smaller and that greater commodity
growth exposure did not lead to increased ex-
penditure on education.


6. Shares of manufacturing and services in GDP


There were also some positive aspects to the
greater use of the revenues from commodities


for foreign financial investments – principally,
averting Dutch disease effects due to higher
revenues from commodity exports. Whereas
during the period 1995–2002, more commodity
growth exposure tended to decrease the share
of the non-primary (manufacturing and services)
sectors in GDP in all countries, in the subsequent
period this effect had disappeared in the 40 per
cent of poorer countries. However, it persisted,
albeit to a smaller extent, in the 60 per cent of
richer countries.


7. Gross capital formation as a share of GDP


For the poorer countries, there appears to
be some (though minor) positive correlation
between the boom and greater gross capital
formation (but not in richer countries), which
had not been the case during the previous
period, 1995–2002. However, this may well
refer to gross capital formation in the primary
sector only (e.g. investment in mineral ex-
traction), and therefore may not necessarily
indicate structural transformation and devel-
opment.


8. Real effective exchange rate (REER) and change
in the REER


Another Dutch disease effect, namely apprecia-
tion of the REER, was one effect of greater com-
modity growth exposure in the richer countries
during 1995–2002, but it was avoided during
2003–2009. In the poorer countries, the appre-
ciation effect was always statistically insignifi-
cant.23 Also, the effect of the change (rather than
the level) of REERs went from being insignificant
to positive in the low-income countries and from
negative to insignificant in the middle-income
countries.


9. Change in FDI as a share of GDP


The negative effect of greater commodity growth
exposure on the FDI/GDP ratio that was perva-
sive in 1995–2002 disappeared in 2003–2009.
This may well be linked to larger resource-seek-
ing FDI inflows after 2002, an aspect discussed
further in section 4.2 of this chapter.


It should be noted that these findings from the
econometric analysis are more robust and broadly in
line with the outcomes of the explorations in section
3.2. The results of the analysis presented here sug-
gest that revenues from commodity exports stimu-
lated the build-up of financial assets, while simul-
taneously the link between those export revenues,
diversification and the development of productive
capacities was weak in the poorer economies. It is
argued that this was part of observed changes in in-
ternational financial policies, which is the subject of
the next section.


Whilst the
poorest CDDCs
appear to have
used commodity
revenues for
debt reductions
…. The richer
countries
experienced
an increase in
domestic financial
development,
with greater
commodity
exposure during
the boom period.


Revenues from
commodity
exports
stimulated
the build-up
of financial
assets, while
simultaneously
the link between
those export
revenues,
diversification and
the development
of productive
capacities
was weak in
the poorest
economies.




118


COMMODITIES AND DEVELOPMENT REPORT


4. COMMODITy
DEPENDENCE IN ThE
CONTExT Of fINANCE-
DRIVEN gLObALIzATION


4.1. Commodity dependence,
international finance and
growth: lessons learned


A striking feature of the commodity boom years was
the strong growth in developing countries. However,
the boom also exacerbated global imbalances while
increasing reserve accumulation and the number
and volumes of SWFs. In emerging market econo-
mies such as Brazil, China and the Russian Federa-
tion, and in West Asia, the surge in revenues from
commodity (and merchandise) exports led to the ac-
cumulation of foreign assets held both by private citi-
zens and their governments (as foreign reserves). On
the other hand, the low-income developing countries
continued to run current account deficits throughout
the 2000s, but, perhaps surprisingly, also increased
their reserves very substantially. This was arguably
initiated on the advice of international donors and
the IMF, and in response to greatly increased global
financial volatility.


There exists a strong self-propelling mechanism:
the growing tendency to employ export revenues
and capital inflows for investment in capital markets
abroad has increased the liquidity of those markets,
further pushing up commodity prices, export rev-
enues and current account surpluses (including in
China, the Russian Federation and West Asia) (Table
4.2, row 1), and necessitating a further build-up of
reserves as buffers against volatility.


Table 4.2 reflects the overarching accounting iden-
tity: over any period net external financial inflows
plus the current account balance must be equal to
the change in official reserves plus the change in
private claims on foreigner investors. For instance,
in all developing countries during the period 2003–
2008, annual financial inflows on current account


($461 billion) plus net external financing inflows
($838 billion) equalled the increase in official re-
serves ($689  billion) and the increase in claims
on foreigner investors held by the private sector
in developing countries ($610  billion) (Obstfeld,
2009, note 5). Thus the commodity boom im-
proved the capital account of a few major export-
ing CDDCs.


Table 4.2 suggests that even in the boom years,
most developing countries and emerging coun-
tries were unable to achieve a current account
surplus (see row 4 which excludes China, the
Russian Federation and West Asia). A continuing
current account drain might reflect the building
up of real capital, as resources would be spent on
imports in support of fixed capital formation and
upgrading for greater productivity. However, the
analysis presented above (section 3.3) and Table
4.2 show that what accumulated in these years
was not real capital but financial capital in both
public and private sector accounts. Net external
financing comprises FDI, portfolio investments
and loans. The large increase in these capital
inflows into developing countries reflects the fi-
nancial globalization of the past few decades, but
reserves increased vastly and more rapidly – ten-
fold in nominal terms – between the mid-1990s
and the mid-2000s (row 3, Table 4.2).


Table 4.2 also shows that even excluding the accu-
mulation of dollar reserves by China and petro and
gas dollars by West Asia and the Russian Federation,
the other developing countries increased their re-
serves more than fivefold. Since inflows must equal
outflows in any balance sheet, the above balance
sheet identity (that inflows equal the change in of-
ficial and private reserves) indicates that the change
in official and private reserves represents an outflow
of liquidity from the domestic economy (i.e. they are
resources spent outside that economy). Reserves as
well as private claims are investments in the bond,
stock and derivative markets of other countries. This
may be viewed as a prudent and responsible policy


A striking feature
of the commodity
boom years was


the strong growth
in developing


countries.
However, the


boom also
exacerbated


global imbalances
while increasing


reserve
accumulation.


The commodity
boom improved


the capital
account of a few
major exporting


CDDCs. However,
most developing


countries were
unable to achieve
a current account


surplus.


Table 4.2. Trade earnings, capital inflows and reserves of all developing and emerging
countries in the sample, 1990s and 2000s


1992–1997
Average ($ bn)


2003–2008
Average ($ bn)


1. Current account balance -86.5 460.7


2. Net external financing 289.5 837.9


3. Increase in reserves 64.3 689.4


4. Current account balance (excl. China, Russian Federation and West Asia) -96.7 -38.9


5. Net external financing (excl. China, Russian Federation and West Asia) 225.6 470.0


6. Increase in reserves (excl. China, Russian Federation and West Asia) 39.7 218.6


Source: Obstfeld (2009: 69), based on IMF data.




119


cHapter IV: indiRect effects of the Recent commodity boom


for growth to financial stability as a prerequisite
for growth. Thus, commodity earnings and the
capital flows they have attracted have been used
more for financial purposes than for real-sector
development. Whatever form the financial acqui-
sitions take (such as purchasing foreign govern-
ment bonds or corporate bonds and stocks), their
deployment for financial purposes prevents them
from being used for other development and social
purposes, such as building up the stock of capital
equipment (e.g. plants and machinery), or investing
in education, health and infrastructure, which are
critical to the structural transformation of econo-
mies. This explains much of the simultaneous fi-
nancial asset growth and the decoupling of com-
modity export revenues from growth in the poorer
economies in the sample.


That this also occurred in many other developing
economies during the same period is not coinci-
dental. Since the 1997-1998 Asian financial crises,
developing countries have recognized – or have
been persuaded by investors and the IFIs – that
there is a need for more buffers against growing
global financial instability (Spiegel, 2008; UN-DE-
SA, 2010).


Sovereign wealth funds have been the single most
prominent vehicle to separate financial inflows – in-
cluding commodity gains – from the domestic real
economy. As noted, SWFs mushroomed during the
commodity boom years, and have served to direct
less developed economies’ windfall gains into in-
ternational bond and stock markets rather than into
fixed capital formation, productivity and employment
in developing countries. Of an estimated $4.7 trillion
held in SWFs by end 2011, $3.9 trillion (82 per cent)
was owned by developing and emerging countries.
Commodity-derived SWF assets owned by these
countries accounted for an estimated $2 trillion (Ta-
ble 4.3).


Fiscal stabilization funds have also been used by a
number of commodity-exporting countries for some
time, and have been the subject of interest for many
other developing countries as well in this era of high
commodity prices, increased price volatility and
uncertainty in revenues (see Box 4.1). Developing
countries’ experiences with stabilization funds have
shown that a strong institutional framework, trans-
parency and accountability are essential for making
them work effectively. An inclusive multi-stakeholder
approach, such as the Extractive Industries Trans-
parency Initiative,26 involving the private sector and
civil society organizations has helped promote trans-
parency, accountability and governance in the use
of these funds in some countries (UNCTAD, 2009a).
Such initiatives have also served to uncover financial
irregularities which can contribute to the demise of
these funds.


aimed at building up buffers in a volatile world. On
the other hand, there are opportunity costs to build-
ing such reserves, as these are resources that could
have been used to develop a domestic economy’s
productivity or employment (see, for example,
Spiegel, 2008; UN-DESA, 2010). Although the ac-
cumulation of reserves from commodity revenues
may help to smooth economic growth, they do not
build capacity unless the resources are repatriated
at a level that does not exceed domestic absorp-
tive capacity. The strategy of reserve accumulation
adopted by developing countries has two potential
implications:


(i) It has encouraged net positive lending (capital
transfers) from themselves to developed coun-
tries, and may also have contributed to rising
levels of domestic public debt in some devel-
oping countries because of monetary steriliza-
tion.24


(ii) There are potentially high social costs of re-
serve accumulation. Rodrik (2006) notes that
for developing countries these costs (the differ-
ence between short-term borrowing abroad and
the yield on international reserves) account for
around 1 per cent of GDP per annum. Similarly,
Akyüz (2008) has estimated an annual cost of
reserve accumulation to developing countries of
$100 billion.


A third inference from Table 4.2 is that commodity
revenues, which, like all export proceeds, appear in
the current account, were dwarfed by net external
financing inflows. The availability of finance for in-
vestment and for maintaining financial stability in
many countries is increasingly dependent on the
ability to attract sufficient capital flows, including,
but also exceeding, export revenues, and to retain
these.


The imperative to build up reserves has been so
strong that it has not only absorbed a large propor-
tion of commodity gains, it has also driven coun-
tries to seek capital inflows (including portfolio
investments) to feed it (Table 4.2). However, these
inflows carry future liabilities in the form of inter-
est and loan repayments, or foregone profit and
policy space. For developing countries, the main
implication of the fickleness and growing volatility
of international capital inflows is that these recipi-
ent countries face greater exposure to shocks and
crises which can be large, as in 2009, and more
frequent (Ocampo and Vos, 2008). The extent to
which these phenomena affect developing coun-
tries depends on their level of economic develop-
ment, the depth of their financial markets and the
quality of their institutions.


This is entirely in line with the shift in focus that
Kregel (2004) noted, from real-sector investment


The availability
of finance for
investment and
for maintaining
financial stability
in many countries
is increasingly
dependent on the
ability to attract
sufficient capital
flows, including,
but also
exceeding, export
revenues, and to
retain these.


Of an estimated
$4.7 trillion held
in SWFs by end
2011, (82 per
cent) was owned
by developing
and emerging
countries.
Commodity-
derived SWF
assets owned by
these countries
accounted for
an estimated
$2 trillion.




120


COMMODITIES AND DEVELOPMENT REPORT


Table 4.3. Developing and emerging countries’ SWF assets, as on Dec. 2011


Country Fund Name Assets($ billion) Inception Origin


Oman State General Reserve Fund 8.2 1980 Oil and gas


Timor-Leste Timor-Leste Petroleum Fund 6.3 2005 Oil and gas


Mauritania National Fund for Hydrocarbon Reserves 0.3 2006 Oil and gas


United Arab Emirates – Abu Dhabi Abu Dhabi Investment Authority 627 1976 Oil


Saudi Arabia SAMA Foreign Holdings 472.5 n/a Oil


Kuwait Kuwait Investment Authority 296 1953 Oil


Russian Federation National Welfare Fund 113.9 2008 Oil


Qatar Qatar Investment Authority 85 2005 Oil


United Arab Emirates –Dubai Investment Corporation of Dubai 70 2006 Oil


Libyan Arab Jamahiriya Libyan Investment Authority 65 2006 Oil


United Arab Emirates – Abu Dhabi International Petroleum Investment Company 58 1984 Oil


Algeria Revenue Regulation Fund 56.7 2000 Oil


Kazakhstan Kazakhstan National Fund 38.6 2000 Oil


Azerbaijan State Oil Fund 30.2 1999 Oil


Brunei Darussalam Brunei Investment Agency 30 1983 Oil


United Arab Emirates – Abu Dhabi Mubadala Development Company 27.1 2002 Oil


Iran, Islamic Rep. of Oil Stabilization Fund 23 1999 Oil


Mexico Oil Revenues Stabilisation Fund of Mexico 6 2000 Oil


Saudi Arabia Public Investment Fund 5.3 2008 Oil


Trinidad and Tobago Heritage and Stabilisation Fund 2.9 2000 Oil


United Arab Emirates– Ras Al Khaimah RAK Investment Authority 1.2 2005 Oil


Nigeria Nigerian Sovereign Investment Authority 1 2011 Oil


Venezuela, Bolivarian Rep. of FEM 0.8 1998 Oil


Gabon Gabon Sovereign Wealth Fund 0.4 1998 Oil


Equatorial Guinea Fund for Future Generations 0.08 2002 Oil


United Arab Emirates – (Federal) Emirates Investment Authority n/a 2007 Oil


Oman Oman Investment Fund n/a 2006 Oil


United Arab Emirates – Abu Dhabi Abu Dhabi Investment Council n/a 2007 Oil


Papua New Guinea Papua New Guinea Sovereign Wealth Fund n/a 2011 Gas




121


cHapter IV: indiRect effects of the Recent commodity boom


Table 4.3. Developing and emerging countries’ SWF assets, as on Dec. 2011


China SAFE Investment Company 567.9 1997 Non-commodity


China China Investment Corporation 409.6 2007 Non-commodity


China – Hong Kong Hong Kong Monetary Authority Investment Portfolio 293.3 1993 Non-commodity


Singapore Government of Singapore Investment Corporation 247.5 1981 Non-commodity


Singapore Temasek Holdings 157.2 1974 Non-commodity


China National Social Security Fund 134.5 2000 Non-commodity


Malaysia Khazanah Nasional 36.8 1993 Non-commodity


Brazil Sovereign Fund of Brazil 11.3 2008 Non-commodity


Bahrain Mumtalakat Holding Company 9.1 2006 Non-commodity


China China-Africa Development Fund 5 2007 Non-commodity


Viet Nam State Capital Investment Corporation 0.5 2006 Non-commodity


Indonesia Government Investment Unit 0.3 2006 Non-commodity


Mongolia Fiscal Stability Fund n/a 2011 Mining


Botswana Pula Fund 6.9 1994 Diamonds and minerals


Chile Social and Economic Stabilization Fund 21.8 1985 Copper


Kiribati Revenue Equalization Reserve Fund 0.4 1956 Phosphates


Developing and emerging country total 3 927.6


World total 4 777.9


Source: Sovereign Wealth Fund Institute, at: http://www.swfinstitute.org/fund-rankings/


Box 4.1. Chile’s structural fiscal balance policy


Chile, like many other developing countries, is dependent on commodity exports, which makes its economy
sensitive to commodity price volatility. This, coupled with the public ownership of its main commodity
export, copper, exposes Chile to the natural resource curse syndrome. However, the introduction of a
structural fiscal balance policy in 2001 helped the country to successfully avoid the Dutch disease. The
aim of this measure was to develop a cyclically neutral fiscal policy where current expenditure is linked to
the structural level of fiscal income (Ffrench-Davis, 2010). This structural level is estimated by the Chilean
Ministry of Finance based on the output gap between trend GDP and actual GDP, and on the medium-term
forecast for copper prices. The expenditure is then calculated with respect to this structural budget so as
to allow an annual surplus of 1 per cent (UNCTAD, 2010b).


In other words, during a period of economic boom the Government collects larger than “normal” tax
revenues but there is no corresponding increase in expenditure, thus accumulating savings. During bust
periods, the Government can use those savings to cover falling tax revenues associated with a slowdown
in activity, thereby maintaining the level of expenditure. This balancing methodology isolates the impact of
the business cycle on public finances by adopting a long-term perspective of the fiscal situation in terms
of both income and spending. Moreover, this kind of policy not only stabilizes revenue over the commodity
price cycle; it also reduces the pressure on the exchange rate to appreciate during the boom period. To
date, the Chilean rule has worked well: since 2001 the country has accumulated large surpluses which
have been channelled into a sovereign fund offshore.




122


COMMODITIES AND DEVELOPMENT REPORT


Box 4.2. Chinese FDI in Africa’s commodity sector: some preliminary observations


China has had a long relationship with Africa, but the phenomenal increase in its investment in this continent
coincided with the commodities boom. It began with its “Going Global” strategy, announced in 1999, to promote
its overseas investment activity. Between 2003 and 2009, China’s outward FDI rose almost sevenfold, from $33
billion to $230 billion.a While China’s outward FDI was still only 1.2 per cent of the world’s total FDI in 2009, its
share of FDI to developing countries has increased steadily since the 1990s, to 9 per cent in 2003 and 17 per
cent in 2009 (Cheung et al., 2011). In an UNCTAD survey in 2010, China ranked as the second most promising
global investor (UNCTAD, 2010a).


The evidence to date on the limited effects of FDI in poor developing countries, cited above, cannot simply
be based on China’s investment in African resource-rich economies. Cheung et al. (2011) show that Chinese
investment until 2005 mostly took the form of contracted projects rather than conventional FDI, which is the
(part-) transfer of firm ownership. Indeed, China’s trade and investment in Africa have increased since the late
1990s (Box chart 1; see also UNCTAD, 2011, chapter 2). Contracted projects involve a barter deal where
infrastructure is built in return for (access to) natural resources (Foster et al., 2008).


Whether China’s sharply rising investments in Africa were guided by a strategic resource-seeking motive or not,
it is well documented that its contracted projects and FDI have been directed mostly to Africa’s resource-rich
countries (Brautigam, 2008). One reason for this may be that in those countries, where infrastructure is typically
poor, the returns on investment in infrastructure development are relatively large. In this sense, Chinese FDI may
have symbiotic effects. Another reason may be that investment in infrastructure facilitates increased access to
resources and to Africa’s expanding consumer goods markets (Corkin, Burke and Davies, 2008).


The study by Cheung et al. (2011) of Chinese FDI covering the period 1991–2005 identifies a number of
possible determinants of investments, including market size, income levels, growth rates, trade intensity and
contracted projects (which are formally not part of FDI). To this it adds energy and mining output (as shares of
GDP) to capture the resource-seeking motive. It also identifies various risk factors, such as corruption, conflict,
and law and order. The findings are interesting: before the Going Global programme was announced in 1999,
an economy’s energy and mining output were not significant factors attracting Chinese FDI, but they were after
2002. This is in line with the view that the Going Global initiative was designed to support China’s domestic
industry.b Further, using a second data set for the years 2003–2007,c consistent with the IMF/OECD format for
FDI data, Cheung et al. find that energy and mineral output (as shares of GDP) have clearly been significant
determinants of China’s investment activities. Their analysis does not specify whether this has been due to




China’s FDI in Africa (right axis) Trade (left scale)


Contracted projects (left scale)




19
91


19
92


19
93


19
94


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


$
Bi


lli
on


$
Bi


lli
on


100
90
80
70
60
50
40
30
20
10
0


6


5


4


3


2


1


0


Box chart 1. China’s trade, FDI and contracted projects in Africa, 1991–2008
($ billion)


Source: Cheung et al. (2011); IMF Direction of Trade (DOT); Ministry of Commerce, China, 2009
Commerce Yearbook of China.




123


cHapter IV: indiRect effects of the Recent commodity boom


4.2. foreign direct investment
by firms and States


Rising commodity prices attracted increasing invest-
ment in commodity-rich economies. While FDI can
benefit host economies through employment, capital
and technology spillovers, these effects are known
to depend on a well-researched set of conditioning
factors. Among these are the motive for investment
(resource-seeking versus market-seeking), the host
country’s level of development and linkages with the
rest of the economy. FDI typically competes with re-
source use for domestic purposes that have larger
first- and second-round growth effects, as when land
used for domestic staple food production is allocated
for the production of palm oil or soybean for export.


Resource-seeking investments tend to have fewer
development benefits as they typically do not seek to
introduce or develop new technologies unlike invest-
ments in manufacturing. Technological spillovers in
resources are rare, given the limited scope for pro-
ductivity improvement of labour-intensive products
or, more typically, a wide technological gap with
the host economy and large investment barriers in
capital- intensive resource exploitation, as in mining
and oil drilling. In any case, resource-seeking invest-
ments lack an “appropriate” level of technology for
spillovers to occur (Los and Timmer, 2005). In addi-
tion, the number of high-quality jobs created through
this type of investment remains quite limited (Adisu,
Sharkey and Okoroafo, 2010; Trofimov, 2007).


Even where opportunities for spillovers exist, often
these are not fully taken up by the host country due
to weaknesses in infrastructure, the education sys-
tem, research and development support, extension
systems, and more generally, in the legal and regula-


tory framework. Clearly, these are major bottlenecks,
especially for LDCs. In Africa’s natural resource sec-
tor, both factors – few spillover opportunities and
limited absorptive capabilities due to low levels of
economic development – have combined to render
FDI of limited use to host countries’ development.
Herzer, Klasen and Nowak-Lehmann (2008) and
Görg and Greenaway (2004) document how low-
income developing countries typically are unable
to benefit from FDI due to their limited absorptive
capacities (see also UNCTAD, 2005). Herzer, Klasen
and Nowak-Lehmann (2008) tested the FDI-growth
hypothesis for 28 of the poorest developing coun-
tries using cointegration techniques on a country-
by-country basis. They found that in the vast major-
ity of countries FDI has had no statistically significant
long-term impact on growth, and in some cases it
has even had short-term negative growth impacts
(see also Görg and Greenaway, 2004).


In light of the above, it is not surprising that even
in those countries where the commodity price boom
attracted large FDI inflows, this had little impact on
non-resource sector growth, the wider economy and
employment. This may have been due to the lack
of greenfield investments, as FDI in these coun-
tries often takes the form of a transfer of ownership
claims (e.g. bonds, stock shares etc) to the income
streams associated with already existing physical
assets. Also, a host country’s share of revenues from
resource exploitation is often meagre, as contracts
generally favour investors (UNCTAD, 2005). The oth-
er perspective, developed in the previous sections, is
that countries have often used the foreign exchange
from FDI for building their reserves and for financial
investments rather than for investing domestically.
This policy choice may have been imposed by the
international financial environment, and logically


Even in those
countries where
the commodity
price boom
attracted large
FDI inflows, this
has had little
impact on non-
resource sector
growth, the wider
economy and
employment.


China’s Going Global policy or to the exceptionally high prices of oil and other energy output during these years.
But they are not, after all, mutually exclusive motivations.


In summary, China’s outward FDI in support of its own industrial growth may have a potentially symbiotic relationship
with the host countries. However, the effect may not be entirely benign, as the arrangements governing this at
present may undermine the debt servicing capacity of the host countries. Moreover, concerns about the impact of
this investment in other areas (e.g. environment and political reforms) may warrant further study.
a According to the Chinese Ministry of Commerce, non-financial outward FDI from China rose 1.8 per cent year-on-year to $60.07


billion in 2011, taking the country’s total non-financial outward FDI to $322 billion by the end of 2011. China made investments in
132 countries in 2011, with its outward FDI in Europe and Africa up 57.3 per cent and 58.9 per cent, respectively, to $4.61 billion and
$1.7 billion respectively. Investment through mergers and acquisitions, mainly in the mining, manufacturing, electricity, communications
and retail sectors, reached $22.2 billion in 2011, accounting for 37 per cent of its total outward FDI (see http://english.mofcom.gov.
cn/aarticle/newsrelease/counselorsoffice/westernasiaandafricareport/201201/20120107945037.html. Xinhua News article posted
January 31, 2012.


b Shankleman (2009) notes that the Chinese Government’s 2006 Outward Investment Sector Direction Policy has supported the
acquisition of resources or raw materials that are lacking domestically and which are urgently required for the development of the
economy. The policy achieves this through the removal or relaxation of restrictions on capital outflows and the provision of incentives
for outward investment. In the last decade, China proposed a new form of overseas investment – finance for assured supply – which
provides long-term loans to overseas oil and gas firms to develop new capacity in return for a long-term supply (guaranteed volume)
contract with a Chinese State oil company at prevailing market prices.


c The 2008 and 2009 data could not be included in the series due to a change in definition.


Box 4.2. Chinese FDI in Africa’s commodity sector: some preliminary observations (continued)




124


COMMODITIES AND DEVELOPMENT REPORT


resulted in disappointing growth and productivity ef-
fects of FDI from resource exploitation.


Beyond the profit-seeking motives attributed to firms
investing in resource-rich economies, there may
have been a strategic motive on the part of countries
that were seeking to safeguard their future access
to food, fuel, minerals and metals. Amongst the most
widely publicized and researched cases is that of
China’s investments and contracted projects in Afri-
can economies (box 4.2; see also Brautigam, 2009;
Cheung et al., 2011).


5. LAND ACquISITION AS A
CATEgORy Of fDI IN ThE
COMMODITIES SECTOR


The acquisition of land as a category of FDI merits
separate attention for several reasons. Despite the
scarcity of robust data on trends in this recent type
of investment, it is generally agreed that it has rap-
idly assumed large proportions. Zagema (2011) esti-
mates that foreign land acquisitions (or “land grabs”)
in developing countries cover an area amounting to
227 million hectares, an area the size of Western Eu-
rope. Similarly, Cuffaro and Hallam (2011) note that
between 1990 and 2008 the inward stock of FDI in
developing economies grew by a factor of 3.3 in ag-
riculture, forestry and fishing, and by a factor of 5.6
in food, beverages and tobacco. While this may be an
indication of their growing importance, land acquisi-
tions are often forms of FDI that are not undertaken
by transnational corporations (TNCs). Instead, they
may be undertaken by private equity or State-owned
funds, sometimes specially established for this pur-
pose (Cuffaro and Hallam, 2011). Also, since FDI
deals only appear in the official statistics once fully
paid, this implies a potentially long time lag between
the activity and collated data on land transactions.27


Therefore, it is mainly media reports that have drawn
attention to the phenomenon of land acquisitions by
foreign investors, which has prompted further analy-
sis through case studies. Nonetheless, it is clear
that the scale of these transactions is often vast,
with many involving more than 10,000 hectares
and some even more, as in the 100,000 ha agree-
ment between Mali and the Libyan Arab Jamahiriya
in 2008 (GTZ, 2009) or the (eventually aborted) deal
covering 1.3 million ha between Daewoo Logistics of
the Republic of Korea and the Government of Mada-
gascar (Financial Times, 2009).


As Cuffaro and Hallam (2011) report, this form of FDI
is mainly directed at acquisition of agricultural land,
mostly through long-term leasing of up to 99 years,
and it is often linked to infrastructure development.
Major current investors are the Gulf States, but also
China and the Republic of Korea. The main targets of
this type of investment are countries in Africa, but also


those in South-East Asia and South America (UNCTAD,
2009b). The Gulf countries have favoured investments
in Sudan and other, mainly African member States
of the Organization of the Islamic Conference (OIC),
for example, while, outside Asia, China has favoured
Zambia, Angola and Mozambique.


Since domestic agricultural development is a sine
qua non for broader development in poor coun-
tries (World Bank, 2008; Bezemer and Headey,
2008), access to land by domestic producers is an
issue of strategic importance. Rural development
strategies centred on sustained government sup-
port for improving the productivity of small farm-
ers, have been at the heart of the Green Revo-
lution growth miracles of the 1960s and 1970s.
More recently, such strategies have focused on
agricultural growth and economic diversification,
as in China since the 1980s and in Cambodia and
Viet Nam since the 1990s. But governments can-
not plan, implement and direct these processes
if agricultural land is owned or leased on a long-
term basis by foreign companies that develop
plantations and/or export-oriented agriculture
and often exclude domestic smallholders. In this
sense, foreign land acquisitions reduce the “policy
space” for poor countries.


Moreover, access to land is typically the basis for
poor people’s livelihoods, so that foreign land acqui-
sitions can have detrimental impacts on local pov-
erty and social conditions, even if there are positive
macroeconomic impacts. This adds a developmental
and distributional aspect to the evaluation of foreign
land acquisitions.


In Mali and Ghana, for example, the fact that statu-
tory law considers all land to be State-owned, which
the government can dispose of irrespective of un-
written customary rights, makes land acquisition
through FDI a major concern for their populations
(GTZ, 2009; FAO, 2009). Much of the case study lit-
erature on recent large land acquisitions shows that,
typically, existing land uses and claims go unrec-
ognized in a context of complex and insecure land
rights (FAO et al., 2010).


In a study on large land acquisitions focusing on
sub-Saharan Africa, Cuffaro and Hallam (2011:7),
quoting Cotula et al. (2009), observe that:


Most if not all productive land targeted for
potential investment was likely to be already
claimed by farmers, herders, hunters or forag-
ers. Land is most commonly owned or other-
wise held by the state, local people may enjoy
use rights over state land, land titles are ex-
tremely rare - the World Bank estimates that,
across Africa, only between 2 and 10 per cent
of the land, mainly urban, is held under formal
land tenure - and the extent to which national


China’s outward
FDI in support of
its own industrial
growth may have


a potentially
symbiotic


relationship
with the host


countries.


Since domestic
agricultural


development
is a sine qua


non for broader
development in
poor countries,
access to land


by domestic
producers is an


issue of strategic
importance.


Since 2001
foreign land
acquisitions


in developing
countries cover


an area of the
size of Western


Europe.




125


cHapter IV: indiRect effects of the Recent commodity boom


legal frameworks protect local land claims is
variable but often limited. The World Bank’s
recent report on land investments29 concludes
that countries with poorer records of formally
recognized rural land tenure have attracted
greater interest, whilst, in contrast to standard
results on general foreign direct investment,
rule of law and a favourable investment cli-
mate had a weak effect on planned and none
on implemented investment.Hence the current
wave of FDI flows and land acquisitions is tak-
ing place in contexts where many people have
only insecure land rights – which makes them
vulnerable to dispossession. .


These broader considerations give ample reason to be
concerned about the developmental impacts of land
acquisitions. In view of the above findings, there is
also little basis to argue that these drawbacks will be
offset by the benefits of capital inflows in return for
land acquisition. With this form of transaction, devel-
oping countries are giving up long-term control over a
major productive resource in return for finance which
they tend to use not for economic development and
diversification but for financial investment. Another
drawback to land acquisition is that often it favours
foreign investors, and is unlikely to yield positive
outcomes for the host country in the long term. On
the positive side, if foreign investors acquire land not
against payment, but for the development of infra-
structure, as China often does, there is an argument
that this helps overcome a bottleneck in development
– perhaps more effectively than decades of develop-
ment assistance have done (Brautigam, 2008).


Given the paucity of reliable data and of solid research
on the extent, conditions and impact of foreign land ac-
quisitions, the “land grab” debate is dominated by nar-
ratives that may require qualification. Franco and Car-
ranza (2011) consider the narrative about the existence
of available marginal lands – defined as thinly inhab-
ited, unproductive, underproductive, underutilized, idle
lands that can be transformed into zones of production
for food and biofuels to solve the world’s food and en-
ergy problems without undermining local food needs
– as being fundamentally flawed. But equally, they ar-
gue that the counter-narrative, claiming that acquiring
these lands in the context of recent land investments
and global land grabbing will result in the displacement
and dispossession of poor people, is only partly correct.


Chapter 3 of this report discussed the relatively poor
growth of agricultural productivity in developing coun-
tries, especially in Africa. With the agricultural frontier
expanding only marginally (mostly in sub-Saharan
Africa), the availability of arable land per person may
continue to decline. However, if “land grabs” result in
major new production, even though they might entail
a loss of national control, there could be some ben-
efits. But this assumes that: (a) the land is not being


used; and (b) even if that is the case, it can be made
productive without diverting scarce resources (e.g.
water) from existing production. If neither of these as-
sumptions hold, then the net increase in output (put-
ting aside issues of distribution and control) will be
less than the output from the new land – and could
even be very small or negative.


Franco and Carranza`s (2011) study was part of a
2011 conference on “global land grabbing” which
studied these local impacts and the associated po-
litical economy effects. This research makes clear
that foreign land acquisitions as well as land pur-
chases and governments are not just a China-Africa
phenomenon, as some examples suggest; there
have been expropriations by domestic companies
as well. Marin, Lovett and Clancy (2011) report that,
in Colombia, agrarian political struggles are often
a response to the increasing appropriation of land
by local and national elites and corporations for the
production of biofuels and feedstock for the national
market and for export. Ginting and Pye (2011) stud-
ied the Merauke Integrated Food and Energy Estate
in West Papua, Indonesia, and the emerging local
resistance to it. Hall (2011) analyses the shifting role
of South African farmers, agribusiness and capital
elsewhere in the Southern African region. She finds
that it frequently takes the form of large concessions
for newly formed consortia and agribusinesses, and
that there is an increasing reliance on external fi-
nancing through transnational partnerships. For in-
stance, she reports that, as of early 2010, the South
African commercial farmers’ association, Agri South
Africa, was engaged in negotiations for land acquisi-
tions with the governments of 22 African countries.


Shete (2011) has described how the Ethiopian Gov-
ernment is leasing out large tracts of arable lands
both to domestic and foreign investors in different
parts of the country where land is relatively abun-
dant. Based on interviews with 150 farm households
in two districts of the Benshanguel Gumuz region,
Shete found that land sales there were character-
ized by poor coordination, monitoring and support of
investment activities by federal, regional and district
level authorities, weak capacity of domestic inves-
tors, accelerated degradation of forest resources,
and threats to community members’ security of live-
lihoods. In contrast to these bleak findings, Wood-
house and Ganho (2011) argue that to the extent
that foreign “land grab” deals result in the expansion
of irrigation in sub-Saharan Africa, this may accel-
erate the development of water infrastructure and
reduce the uncertainty and risk inherent in much of
African agriculture. But they also present evidence
that foreign investment may compete with existing
water use, as land deals have, in some instances,
included provisions for priority access to water in
case of scarcity.


Much of the
literature on
recent large
land acquisitions
shows that,
typically, existing
land uses and
claims go
unrecognized
in a context of
complex and
insecure land
rights.


CDDCs
governments
should aim to
shift the balance
of power in
favour of local
right-holders and
communities.




126


COMMODITIES AND DEVELOPMENT REPORT


There is need for greater clarity and transparency
in such transactions through legal and regulatory
reforms. In an attempt to constructively address
this issue, an FAO/IFAD/UNCTAD/World Bank (2010)
report outlines the following seven principles of re-
sponsible land acquisition:


(i) Existing rights to land and associated natural
resources should be recognized and respected.


(ii) Investments should not jeopardize food security,
but rather strengthen it.


(iii) Processes for accessing land and other resources
and then making associated investments should
be transparent and monitored, with accountabil-
ity by all stakeholders ensured through a proper
business, legal and regulatory environment.


(iv) All those materially affected should be consult-
ed, and agreements from consultations recorded
and enforced.


(v) Investors should ensure that projects respect the
rule of law, reflect industry best practices, are
viable economically and result in durable shared
value.


(vi) Investments should generate desirable social
and distributional impacts and should not in-
crease vulnerability.


(vii) Environmental impacts of a project need to be
quantified and measures taken to encourage
sustainable resource use, while minimizing the
risk/magnitude of negative impacts and mitigat-
ing them.


In summary, foreign investment in land is often
large-scale, is growing rapidly, occurs typically in
ambiguous legal contexts and is still insufficiently
researched. While “land grabs” attract large, one-
off financial inflows, the economic impact of these
inflows is unclear, while their developmental im-
pact (especially on local communities) is a growing
source of concern.


6. POLICy IMPLICATIONS
This chapter has analysed the indirect impacts of
the commodity boom, and has discussed recent
empirical research on those impacts. It has provid-
ed original empirical work on the boom’s indirect
impacts using data for 142 countries (both com-
modity- dependent and others) during the period
1990–2009. It has paid particular attention to the
imperative for CDDCs to build financial capital, as
identified by Kregel (2004). In order to safeguard
stability in international financial relations, rev-
enues from commodity exports (along with other
inflows) have been used mainly to strengthen inter-
national financial positions by accumulating stocks
of foreign assets and decreasing foreign liabilities,
notably debt.


Structural transformation, as measured by an in-
crease in the shares of non-primary sectors in
GDP, generally occurred until 2003: growth rates of
manufacturing and services were higher than total
value-added growth rates. After 2002, total value-
added growth exceeded non-primary sector growth,
apparently due to strong growth in primary sector
value added as a consequence of the commodity
price boom. From 2004, manufacturing growth de-
coupled from services growth, which was growing
at more than one percentage point higher during
the period 2005–2009. Therefore, in this report’s
sample, something resembling a structural break is
observed at around 2002-2003.


The analyses show that there was also a structural
break with regard to the use of resource revenues
in the middle of the research time series – around
2002. Prior to that, the poorest countries’ greater
commodity growth exposure was associated with
less foreign financial investment. However, in the
second half of the time series (2002–2009) that re-
lationship was reversed: commodity export revenues
were used to support those countries’ investments
in international financial markets. In the top income
quintiles of the sample of developing countries,
this positive link between commodity export rev-
enues and foreign assets, which was present but
weak during the period 1995–2002, disappeared in
2003–2009. The lower income countries also used
their commodity revenues to strengthen their foreign
financial positions during the period 2003–2009 by
increasing their foreign debt service and by prevent-
ing their foreign debt levels (as a share of GDP) from
rising. This also had not been the case previously
in 1995–2002. In contrast, during the period 2003–
2009, the richer countries increased their debt lev-
els with more commodity growth exposure – not just
nominally but even as a share of GDP, despite often
high GDP growth rates.


Thus, financially-driven globalization had varying
impacts on different countries over time, according
to their development and income levels. Regarding
the bottom 40 per cent of countries in the sample,
as a result of their employing commodity revenues
increasingly for debt reduction and foreign invest-
ments, commodity growth exposure in the period
2003–2009 was not correlated with GDP per capita
growth. This finding is in direct contrast to the 1995–
2002 period, and in contrast to the richer countries’
experience during the 2003–2009 period. The richer
countries experienced greater domestic financial
development with more commodity growth exposure
during the 2003–2009 boom years.


The potentially beneficial effects of commodity ex-
port revenues on social expenditure grew weaker
or were even negative in some cases for middle-
income countries during the period 2003-2009. In


While “land
grabs” attract
large, one-off


financial inflows,
the economic


impact of
these inflows


is unclear, their
developmental


impact (especially
on local


communities) is a
growing source of


concern.




127


cHapter IV: indiRect effects of the Recent commodity boom


the poorer countries, greater commodity growth
exposure during the period 1995–2002 led them to
spend more on health but less on education. These
correlations persisted in 2003–2009, during which
the negative effect on educational spending even
doubled. It is possible that their increase in foreign
financial investments was crowding out domestic
social spending.


Nevertheless, there were also positive aspects of the
greater use of commodity export revenues for build-
ing up reserves and investing abroad, a major one be-
ing that it averted any potential Dutch disease effect
of increased commodity export revenues. During the
period 1995–2002, greater commodity growth expo-
sure tended to decrease the share of the non-primary
(manufacturing and services) sectors in GDP in all the
sample countries. In the period 2003–2009, this effect
had disappeared in the poorer countries, although it
was still present but weaker in the richer countries.
Another positive impact was that the the (boom) period
2003-2009 correlated with more gross capital forma-
tion in the poorer countries (but not in the richer coun-
tries), which had not been the case during the period
1995–2002. However, it needs to be borne in mind that
this may well be gross capital formation in the primary
sector only (e.g. investment in mineral extraction), and
may not necessarily indicate transformation. Another
Dutch disease effect that was avoided in the period
2003–2009 but not in the earlier period was an ap-
preciation of the real effective exchange rate.


While it could be argued that the absence of the
Dutch disease may be explained in part by the ac-
cumulation of reserves, it would be erroneous to
suggest that the appropriate response to the threat
of Dutch disease is simply to accumulate more
reserves. The most critical issue is how commod-
ity-exporting countries should deal with windfall
revenues without compromising their broader de-
velopment objectives. As argued by Ocampo (2005)
with regard to increased aid flows (which could also
potentially trigger Dutch disease), it is partly a matter
of ensuring that governments have a much broader
view of macroeconomic stability along with suffi-
cient policy space to manage external flows of all
kinds. In any case, a more developmental approach
would be to ensure that windfall incomes are used
to help alleviate domestic supply constraints in order
to ensure that any associated increase in demand
does not trigger strong inflationary pressures. Es-
sentially, this entails using this revenue not only to
finance “productivity-increasing investments” (IMF,
2003), but also to create opportunities for additional
foreign exchange earnings. This will necessitate, in-
ter alia, increasing expenditure on economic infra-
structure which, in an appropriate macroeconomic
policy framework, should promote structural trans-
formation and economic diversification, and in turn


unleash the foreign exchange earning potential of
the CDDC economies.30


Finally, the negative effect of greater commod-
ity growth exposure on the FDI/GDP ratio that was
common during the period 1995–2002 had disap-
peared by 2003–2009. This may well be linked to
larger resource-seeking FDI inflows after 2002. High
resource prices may have stimulated FDI, especially
to resource-rich economies and in specific resourc-
es (such as the extractive sector). In assessing the
importance of commodities in attracting investment,
based on recent econometric research of the much-
debated case of China’s investments in Africa, it was
found that their role was indeed significant. A review
of research specifically about the contentious and
topical issue of the acquisition of land as a category
of FDI, also known as “land grabs”, leads to the con-
clusion that foreign investment in land is often large-
scale, is growing rapidly, occurs typically in ambigu-
ous legal contexts and is still under-researched.


This chapter suggests that as financial globalization
accelerated after the bursting of the dotcom bubble
and the 9/11 terrorist attacks in the United States,
and with the unprecedented monetary easing that fol-
lowed these events, the environment in which devel-
oping countries could use their commodity revenues
was transformed. Some of the consequences, includ-
ing avoiding the long-standing and much-discussed
pitfalls of increased commodity export revenues, such
as Dutch disease, were positive. However, other ef-
fects of the increased emphasis on financial manage-
ment rather than real-sector development and the
strengthening of productive capabilities were more
mixed. By separately studying the poorer countries in
the developing-country sample – a group that largely
coincides with the United Nations classification of
LDCs– the presence of financially-driven globalization
effects was evident. These countries tended to use the
larger inflows resulting from the commodity boom to
increase servicing of their debt and for greater foreign
financial investments, but at the expense of domestic
financial development, spending on education and in-
come growth.


These findings suggest the need for a holistic view of
the consequences of commodity-related (and other)
international financial flows. Developing countries’
may have limited choices on how to invest their
revenues given the current international financial
architecture, the monetary policies of the developed
countries and the views of the IFIs and donors. These
countries may need to formulate and implement ap-
propriate national policies; but equally important, the
international financial system needs to be reformed
and better regulated so as to create the optimum
development context for developing economies to
trade their way out of underdevelopment and pov-
erty.


The most critical
issue is how
commodity-
exporting
countries should
deal with windfall
revenues without
compromising
their broader
development
objectives. It is
partly a matter
of ensuring that
governments
have a much
broader view of
macroeconomic
stability along
with sufficient
policy space to
manage external
flows of all kinds.


As financial
globalization
accelerated at
the beginning of
the 2000s, the
environment in
which developing
countries
could use their
commodity
revenues was
transformed.




128


COMMODITIES AND DEVELOPMENT REPORT


refereNces


Adisu K, Sharkey T and Okoroafo SC (2010). The impact of Chinese investments in Africa. International Journal of Business and
Management, 5(9): 3–9.


Akyüz Y (2008). Managing financial instability in emerging markets: A Keynesian perspective. Working Papers 2008/4, Turkish
Economic Association, Cankaya.


Bezemer D and Headey D (2008). Agriculture, development, and urban bias. World Development, 36(8): 1342–1364.


Brautigam D (2008). ‘Flying geese’ or ‘hidden dragon’? Chinese business and African industrial development. In: Large D, Alden
JC and Soares de Oliveira RMS, eds. China Returns to Africa: A Rising Power and a Continent Embrace. London, Christopher:
51-69.


Brautigam D (2009). The Dragon’s Gift: The Real Story of China in Africa. Oxford, Oxford University Press.


Cheung Yin-Wong, de Haan J, XingWang Qian and Shu Yu (2011). China’s outward direct investment in Africa. Working Papers
132011, Hong Kong Institute for Monetary Research.


Claessens S, Geoffrey RD Underhill and Xiaoke Zhang (2003). Basle II capital requirements and developing countries: A political
economy perspective (mimeo). Amsterdam, University of Amsterdam.


Corkin L, Burke C and Davies M (2008). China’s role in the development of Africa’s infrastructure. SAIS Working Papers in African
Studies no. 04-08, Johns Hopkins University, Baltimore, MD.


Cotula L, Vermeulen S, Leonard R and Keeley J (2009). Land Grab or Development Opportunity? Agricultural Investment and
International Land Deals in Africa. Rome, FAO, IIED and IFAD.


Cuffaro N and Hallam D (2011). ‘Land grabbing’ in developing countries: Foreign investors, regulation and codes of conduct;
available at: http://dipse.unicas.it/files/wp201103.pdf. Das D (2006). Globalization in the world of finance: An analytical history.
Global Economy Journal, 6(1): 2.


Deininger K (2003). Land Policies for Growth and Poverty Reduction. Washington, DC, World Bank and New York, Oxford University Press.


Deininger K and Byerlee D (2010). Rising Global Interest in Farmland: Can It Yield Sustainable and Equitable Benefits? Washington,
DC, World Bank.


Devlin W and Brummitt B (2007). A few sovereigns more: The rise of sovereign wealth funds. Economic Round-up (online) Spring:
119–136; available at: http://search.informit.com.au/documentSummary;dn=282954022550056;res=IELBUS.


Financial Times (2009). Madagascar scraps Daewoo farm deal. (By Tom Burgis in Antananarivo and Javier Blas). 18 March.


FAO (2009). Assessing the nature, extent and impacts of FDI on West African agriculture: The case of Ghana and Senegal (mimeo).
Rome.


FAO, IFAD, UNCTAD and World Bank (2010). Principles for responsible agricultural investment that respect rights, livelihoods and
resources. A discussion note: 1-8; available at: http://unctad.org/en/docs/ciicrp3_en.pdf.


Foster V, Butterfield W, Chen C and Pushak N (2008). Building bridges: China’s growing role as infrastructure financier for sub-
Saharan Africa. Trends and Policy Options No. 5, World Bank, Washington, DC.


Franco B and Carranza A (2011). The fundamentally flawed ‘marginal lands’ narrative: Insights from the Philippines. Paper
presented at the International Conference on Global Land Grabbing, Institute of Development Studies, University of Sussex,
Brighton, 6-8 April 2011.


Frankel JA (2010). The natural resource curse: A survey. NBER Working Papers, 15836, National Bureau of Economic Research,
Cambridge, MA.


Ffrench-Davis R (2010). The structural fiscal balance policy in Chile: Toward a counter-cyclical macroeconomics. Journal of
GlobalizationandDevelopment (1): Berkeley Electronic Press.


Ginting L and Pye O (2011). Resisting agribusiness development: The Merauke Integrated Food and Energy Estate in West Papua,
Indonesia. Paper presented at the International Conference on Global Land Grabbing, Institute of Development Studies,
University of Sussex, Brighton, 6-8 April 2011.


Görg H and Greenaway D (2004). Much ado about nothing? Do domestic firms really benefit from foreign direct investment? World
Bank Research Observer, 19(2): 171–197.




129


cHapter IV: indiRect effects of the Recent commodity boom


GTZ (2009). Foreign direct investment (FDI) in land in developing countries. Eschborn, Deutsche Gesellschaft für Technische
Zusammenarbeit.


Gylfason T (2001). Natural resources and economic growth: What is the connection? Working Paper No. 530, Center for Economic
Studies and Ifo Institute for Economic Research. München, Germany.


Hall R (2011). The next Great Trek? South African commercial farmers move north. Paper presented at the International Conference
on Global Land Grabbing, Institute of Development Studies, University of Sussex, Brighton, 6-8 April 2011.


Herzer D, Klasen S and Nowak-Lehmann FD (2008). In search of FDI-led growth in developing countries: The way forward. Economic
Modelling, 25(5): 793–810.


IMF (2003). World Economic Outlook: Public Debt Management in Emerging Markets. Washington, DC, September.


IMF (2009). Direction of Trade Statistics database. Washington, DC.


Kregel J (2004). Can we create a stable international financial environment that ensures net resource transfers to developing
countries? Journal of Post Keynesian Economics, 26(4) Summer: 573–590.


Los B and Timmer MP (2005). The ‘appropriate technology’ explanation of productivity growth differentials: An empirical approach.
Journal of Development Economics, 77(2): 517–531.


Marin V, Lovett JC and Clancy JS (2011). Biofuels and land appropriation in Colombia: Do biofuels national policies fuel land grabs?
Paper presented at the International Conference on Global Land Grabbing, Institute of Development Studies, University of
Sussex, Brighton, 6-8 April 2011.


Nissanke M (2010). Commodity market structures, evolving governance and policy issues. In: Nissanke M and Mavrotas G, eds.
Commodities,GovernanceandEconomicDevelopmentUnderGlobalization London, Palgrave Macmillan: 65-90.


Obstfeld M (2009). International finance and growth in developing countries: What have we learned? IMF Staff Papers 56(1),
International Monetary Fund, Washington, DC.


Ocampo JA (2005). A broad view of macroeconomic stability. DESA Working Paper 1, United Nations, New York.


Ocampo JA and Vos R (2008). Policy space and the changing paradigm in conducting macroeconomic policies in developing countries.
BIS Paper No. 36, Basel, Bank for International Settlements. In: Tovar CE and Myriam Quispe-Agnoli M, eds. New Financing Trends
in Latin America: A Bumpy Road Towards Stability. BIS Papers No. 36, Bank for International Settlements, Basel.


Papadatos D (2009). Central banking in contemporary capitalism: Inflation targeting and financial crises. Discussion Paper No. 5,
School of Oriental and African Studies, London.


Rodrik D (2006). The social cost of foreign exchange reserves. International Economic Journal, 20(3): 253–266.


Shankleman J (2009). Going global: Chinese oil and mining companies and the governance of resource wealth. Washington, DC,
Woodrow Wilson International Center for Scholars.


Shete M (2011). Implications of land deals to livelihood security and natural resource management in Benshanguel Gumuz Regional
State, Ethiopia. Paper presented at the International Conference on Global Land Grabbing, Institute of Development Studies,
University of Sussex, Brighton, 6-8 April 2011.


Spiegel S (2008). Macro growth policy note. New York, United Nations Department of Economic and Social Affairs.


Trofimov Y (2007). New management: In Africa, China’s expansion begins to stir resentment; Investment boom fuels ‘colonialism’
charges; A tragedy in Zambia. The Wall Street Journal, 2 February.


UN Commission of Experts on Reforms of the International Monetary and Financial System (2009). Report of the Commission
of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial
System; available at: http://www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf


UNCTAD (2005). Economic Development in Africa: Rethinking the Role of Foreign Direct Investment. (UNCTAD/GDS/AFRICA/2005/1),
United Nations publication sales no. E.05.II.D.12. New York and Geneva, United Nations.


UNCTAD (2006). Economic Development in Africa: Doubling Aid: Making the Big Push Work. (UNCTAD/GDS/AFRICA/2006/1), United
Nations publication sales no. E.06.II.D.10. New York and Geneva, United Nations.


UNCTAD (2009a). Report of the Multi-year Expert Meeting on Commodities and Development on its first session. TD/B/C.I/MEM.2/5;
available at: http://unctad.org/en/docs/cimem2d5_en.pdf.


UNCTAD (2009b). World Investment Report 2009: Transnational Corporations, Agricultural Production and Development. New York
and Geneva, United Nations.




130


COMMODITIES AND DEVELOPMENT REPORT


UNCTAD (2010a). World Investment Prospects Survey 2010–2012. New York and Geneva, United Nations.


UNCTAD (2010b). The Least Developed Countries Report: Towards a New International Development Architecture for LDCs. New
York and Geneva, United Nations.


UNCTAD (2011). The Least Developed Countries Report, 2011: The Potential Role of South-South Cooperation for Inclusive and
Sustainable Development. New York and Geneva, United Nations.


UN-DESA (2010). Coordinating capital account regulation. UN-DESA Policy Brief No. 30, June; available at: http://www.un.org/en/
development/desa/policy/publications/policy_briefs/policybrief30.pdf.


Wade RH (2009). From global imbalances to global reorganisations. Cambridge Journal of Economics, 33(4): 539–562.


Woodhouse P and Ganho AS (2011). Is water the hidden agenda of agricultural land acquisition in sub-Saharan Africa? Paper
presented at the International Conference on Global Land Grabbing, Institute of Development Studies, University of Sussex,
Brighton, 6-8 April 2011.


World Bank (2008). World Development Report: Agriculture and Rural Development; available at: http://www.worldbank.org/
WDR2008.


Zagema B (2011). Land and Power: The growing scandal surrounding the new wave of investments in land. Oxfam Briefing Paper,
Oxfam International, Oxford.




131


cHapter IV: indiRect effects of the Recent commodity boom


APPENDIx 1: CDDC DATA
COVERAgE


Table A.1.1 below, presents the value for commod-
ity growth exposure as the average of all values
computed for each year. This is the same for growth
in commodity revenues, and for the share of com-
modities in total merchandise exports (expressed
as a ratio). That is why in table A.1.1, the average
commodity growth exposure is not equal to the aver-
age growth in commodity revenues multiplied by the
average share of commodities in total merchandise
exports. Each of these averages is computed with a
different number of observations. However, for a sin-


gle year, the commodity growth exposure is equal to
the growth in commodity revenues multiplied by the
share of commodities in total merchandise exports -
if data was available to compute these three values.


It should also be noted that for five CDDCs in the
sample, we report a negative commodity growth
exposure. Thus a negative growth (i.e. decline) in
commodity revenues times a positive share of com-
modities in total merchandise exports results in a
negative value for commodity growth exposure.
It appears that these five countries did not benefit
from the boom in terms of increased commodity
revenues.


Commodity growth
exposure


Growth in
commodity
revenues
(per cent)


Share of
commodities
in total export


revenues (ratio)
Iraq 73.1 73.8 1.0
Marshall Islands 39.3 75.6 0.4
Sierra Leone 38.0 55.6 0.7
Chad 36.3 38.3 0.9
Azerbaijan 35.2 38.8 0.9
Cape Verde 35.2 67.6 0.4
Tuvalu 34.0 181.5 0.1
Micronesia, Federated States of, 33.0 40.0 0.8
Belize 25.8 24.5 0.8
Sudan 25.0 25.8 1.0
Angola 24.3 24.4 1.0
Timor-Leste 24.1 27.5 0.8
Mozambique 22.5 23.0 0.9
Kazakhstan 19.0 22.7 0.8
Sao Tome and Principe 18.0 19.3 0.7
Kiribati 17.8 19.8 0.8
American Samoa 17.7 20.7 0.6
Bhutan 17.5 31.5 0.5
Djibouti 17.5 26.4 0.6
Eritrea 17.3 21.1 0.6
Guinea-Bissau 17.2 17.7 1.0
Turkmenistan 16.5 18.1 0.9
Algeria 15.9 16.3 1.0
Congo 15.8 16.0 1.0
Nigeria 15.7 15.9 1.0
Libyan Arab Jamahiriya 15.6 16.2 0.9
Seychelles 14.6 18.2 0.9
Iran, Islamic Rep. of 13.6 14.9 0.9
Bolivia 13.2 14.8 0.8
Rwanda 12.7 13.5 0.9
Myanmar 12.7 18.2 0.7
Mongolia 12.3 15.0 0.8
Zambia 12.0 13.7 0.9
Bosnia and Herzegovina 11.9 26.9 0.4
Peru 11.7 13.7 0.8
Venezuela, Bol. Rep. of 11.6 13.0 0.9
Lao People’s Dem. Rep. 11.5 16.3 0.5
Paraguay 11.5 13.2 0.9
Vanuatu 11.4 11.2 0.7


Table A.1.1. Commodity growth exposure, commodity dependence and growth in commodity
revenues, average, 1996–2009




132


COMMODITIES AND DEVELOPMENT REPORT


Commodity growth
exposure


Growth in
commodity
revenues
(per cent)


Share of
commodities
in total export


revenues (ratio)
Niger 11.4 15.4 0.6
Egypt 11.4 17.5 0.6
Burkina Faso 11.3 12.2 0.9
Ethiopia 11.2 12.0 0.9
Mauritania 11.0 11.3 1.0
Georgia 10.5 16.3 0.6
Samoa 10.5 32.5 0.2
Russian Federation 10.4 15.0 0.7
Tanzania, United Rep. of 9.9 11.2 0.9
Benin 9.7 10.6 0.9
Mali 9.6 10.7 0.9
Maldives 9.6 13.4 0.7
Yemen 9.4 9.6 1.0
Botswana 9.3 9.8 0.8
Ecuador 9.2 10.0 0.9
Chile 9.2 10.9 0.8
Indonesia 9.2 16.7 0.6
Armenia 8.8 11.9 0.6
Viet Nam 8.7 17.3 0.5
Uganda 8.6 10.8 0.9
Belarus 8.5 24.9 0.3
Malawi 8.4 9.6 0.9
Afghanistan 8.0 8.1 0.7
Comoros 7.7 7.6 0.6
Gabon 7.7 8.1 1.0
Somalia 7.7 8.3 0.9
Nepal 7.5 30.1 0.2
Lithuania 7.4 17.6 0.4
Suriname 7.2 8.9 0.9
Uruguay 7.1 10.0 0.7
Kyrgyzstan 7.1 10.5 0.7
Syrian Arab Republic 6.9 7.9 0.8
Lebanon 6.7 17.0 0.4
Palau 6.7 6.7 0.7
Congo, Dem. Rep. of 6.7 7.0 1.0
Colombia 6.7 10.0 0.7
Ghana 6.7 7.7 0.9
Côte d’Ivoire 6.6 8.3 0.8
Korea, Dem. People’s Rep. of 6.5 14.6 0.3
Mayotte 6.2 34.4 0.2
Namibia 6.0 7.4 0.8
Lesotho 6.0 34.6 0.2
Guatemala 5.9 11.1 0.5
Liberia 5.7 4.6 0.4
Cameroon 5.7 6.3 0.9
India 5.6 13.9 0.4
Brazil 5.6 11.8 0.5
Argentina 5.5 8.0 0.7
Antigua and Barbuda 5.3 14.2 0.2
Latvia 5.2 13.1 0.4
Burundi 5.0 4.3 0.9
Bulgaria 5.0 12.8 0.4
Guyana 4.9 5.2 0.9


Table A.1.1. Commodity growth exposure, commodity dependence and growth in commodity
revenues, average, 1996–2009




133


cHapter IV: indiRect effects of the Recent commodity boom


Commodity growth
exposure


Growth in
commodity
revenues
(per cent)


Share of
commodities
in total export


revenues (ratio)
Papua New Guinea 4.9 5.1 1.0
Uzbekistan 4.9 8.0 0.7
South Africa 4.8 8.5 0.5
Nicaragua 4.7 7.5 0.6
Kenya 4.6 6.6 0.7
Guinea 4.6 4.6 0.9
Senegal 3.9 5.6 0.7
Tonga 3.8 2.6 0.7
Cuba 3.7 5.3 0.8
Gambia 3.6 4.1 0.8
Tajikistan 3.4 3.8 0.9
Albania 3.4 13.4 0.3
Solomon Islands 3.3 3.2 1.0
Ukraine 3.2 11.0 0.3
Honduras 3.2 7.2 0.4
Saint Vincent and the Grenadines 3.1 -0.9 0.4
Saint Lucia 2.9 4.8 0.7
Togo 2.8 4.3 0.7
Romania 2.7 13.4 0.2
Zimbabwe 2.7 3.7 0.7
Tunisia 2.7 10.6 0.2
Swaziland 2.6 6.4 0.4
Jamaica 2.5 2.1 0.8
Fiji 2.4 3.2 0.6
Jordan 2.3 8.0 0.3
Malaysia 2.3 8.9 0.2
Morocco 2.2 6.0 0.4
Mexico 2.1 10.3 0.2
Thailand 2.1 8.5 0.3
Sri Lanka 2.1 6.6 0.3
Turkey 2.1 12.1 0.2
Pakistan 2.0 10.0 0.2
Madagascar 1.8 3.9 0.5
Dominican Republic 1.7 8.4 0.2
Saint Kitts and Nevis 1.6 -2.0 0.2
Haiti 1.3 9.7 0.1
Moldova, Rep. of 1.3 3.1 0.5
El Salvador 1.3 3.8 0.3
Panama 1.2 0.1 0.4
Mauritius 1.2 3.4 0.3
China 0.9 9.7 0.1
The former Yugoslav Rep. of Macedonia 0.9 3.2 0.3
Bangladesh 0.9 9.5 0.1
Grenada 0.7 -0.1 0.6
Philippines 0.6 4.8 0.1
Dominica -0.7 -2.2 0.5
Central African Rep. -1.2 -1.4 0.9
Cambodia -1.7 2.7 0.2
Serbia -4.4 -12.2 0.3
Montenegro -22.4 -33.0 0.7


Table A.1.1. Commodity growth exposure, commodity dependence and growth in commodity
revenues, average, 1996–2009




134


COMMODITIES AND DEVELOPMENT REPORT


APPENDIx 2: MODEL
Model selection:31 clearly, the effect of commodity
growth exposure on, for example, economic growth
is moderated by a large number of other variables,
many of which are included as control variables. The
control variables used are intended to reflect:


• Development level and growth, which is cap-
tured by the level and growth of GDP per capita,
in PPP-corrected constant dollars.


• Human capital, which is captured by life expec-
tancy, and expenditure on health and educa-
tion.32


• Economic structure, which is captured by the
value-added shares of the non-primary sectors
in GDP and investment shares in GDP.


• Monetary policy which is captured by the inter-
est rate, credit and money stocks, and foreign
debt as a share of GNI.


• International trade and investment conditions,
which are captured by exchange rates and net
FDI as a share of GDP.


• Dependence on, and nature of, commodity
exports, which are captured by the share of
commodity exports in total exports, and by the
value of net food imports (or exports) scaled
by GDP. By including commodity dependence
(one component of the commodity growth ex-
posure index) in addition to the index itself,
it becomes harder to find significant results
for commodity growth exposure. However,
this component is included but not the other
(growth in commodity revenues) because of
its low correlation with commodity growth ex-


posure, thus avoiding multicollinearity prob-
lems. The coefficient for commodity growth
exposure therefore reflects the effect beyond
simple commodity dependence.33


To demonstrate how control variables matter, the
regressions of economic growth (measured as the
percentage increase in GDP per capita) on commod-
ity growth exposure are shown with and without a
varying set of control variables. Appendix table A.2.1
presents five model specifications, labelled a, b, c, d
and e. These five models start with a simple regres-
sion beginning with the development level (model
a); variables are then added sequentially to capture
human and physical capital formation (model b),
financial development and debt (model c), interna-
tional financial position (model d), and economic and
export structures (model e). This reveals, unsurpris-
ingly, that the positive effect of commodity growth
exposure on the percentage increase in GDP per
capita is robust for all these variables. The size of
the coefficient increases with more control variables
added, which is better for approximating its real val-
ue. However, this is at the cost of a large reduction
in the number of observations as more variables are
added to the model, from 1,792 observations in the
univariate model to 444 in the full model (e). How-
ever, this is theoretically the best model (with least
omitted variable bias). There are no multicollinearity
problems, as is clear from a variance inflation factor
analysis (not shown here). Given the large number
of controls in model (e), it also seems warranted to
interpret the positive and very significant coefficient
for commodity growth exposure (of 1.423) not just
as a correlation, but as an indicator of causation. The
evidence, then, is that commodity growth exposure
has a stimulating effect on growth of GDP per capita.




135


cHapter IV: indiRect effects of the Recent commodity boom


Table A.2.1. Effect of commodity growth exposure on income growth, with and
without control variables


Dependent variable: annual GDP per capita growth rate, per cent (in constant 2005 PPP-corrected dollars)a


Commodity growth
exposure


Model a Model b Model c Model d Model e
0.687*** 0.842*** 0.889*** 0.989*** 1.423***


0.067 0.11 0.306 0.296 0.336
GDP per capita ($) 0.026*** 0.027*** 0.021*** 0.021*** 0.024***


0.001 0.001 0.004 0.004 0.004
Life expectancy (years) 0.533* 0.679 0.875 -1.002


0.315 0.69 0.74 1.051
Gross capital
formation/GDP


428.934*** 444.090*** 436.185*** 487.761***


35.042 75.73 92.801 110.872
Interest rate (%) -4.129*** -4.498*** -4.666***


0.947 0.978 1.063
REER (LCU/FCU) b -0.26 -0.734* -0.627


0.336 0.38 0.417
Credit/GDP -0.062 -0.141 -0.385


0.266 0.266 0.295
Debt/GNI -0.283** -0.566*** -0.290*


0.139 0.161 0.176
FDI/GDP 0.353 0.667


1.757 1.905
Foreign assets/GDP -0.912** -0.950**


0.408 0.431
Non-primary sectors/
GDP


0.824


0.612
Commodity
dependence


-84.747**


33.199
Net food exports/GDP -1.02E+05


107000
(constant)c -5.818*** -126.871*** -50.74 20.123 87.914


1.971 17.183 49.254 54.874 95.947


Nd 1 792 1 234 469 463 444


Sources: UNCTAD secretariat calculations, based on World Bank, WDI database.
Notes: a Standard errors are in italics. One, two and three asterisks indicate a coefficient’s statistical


significance for p=0.1, p=0.05 and p=0.01 respectively. All models are estimated assuming panel-
specific heteroskedasticity.


b LCU/FCU=Local currency units per foreign currency unit.
c Most multiple regression models include a constant term, since this ensures that the model will be


“unbiased” - i.e., the mean of the residuals will be exactly zero. In addition to ensuring that the in-
sample errors are unbiased, the presence of the constant allows the regression line to “seek its own
level” and provide the best fit to data.


d Sample size.




136


COMMODITIES AND DEVELOPMENT REPORT


Table A.2.1 presents the average effect without dis-
tinguishing between time periods and income groups,
even though the exploration above in section 2 suggest-
ed that these are important dimensions. Therefore the
full model (e) (the economic and export structure model)
was estimated separately for the periods 1995–2002
and the 2003–2009, and for the bottom two income
quintiles (the poorest 40 per cent of the 142 countries
each year in income per capita terms) and the top two
income quintiles (the richest 60 per cent of countries
each year). Thus the full model was estimated in four
samples: the bottom 40 per cent in 1995–2002 and in
2003–2009, and the top 60 per cent in 1995–2002 and
in 2003–2009. Table 4.1 in the chapter shows the ob-
servable effects for these subgroups.


The effect of commodity growth exposure was ana-
lysed for over 20 dependent variables, reflecting struc-
tural and financial effects. In the interest of presenta-
tion, not included below are the full regression output
tables for each of the over 180 (5 x 20 + 4 x 20) models
estimated. Instead, for the full model, the coefficient
for commodity growth exposure, plus its standard er-
ror and level of statistical significance are presented in
Table 4.1, section 3.3.


The results of Table 4.1 are interpreted first from an
empirical perspective and then in theoretical and policy
terms. The coefficients in the table are partial correla-


tions of commodity growth exposure with the variable
in the first column, conditioned on a large number of
other variables. By including many control variables, we
increase the likelihood that the correlations reflect one-
way causation – i.e. that they show the effect of com-
modity growth exposure on the variable in the first col-
umn (rather than only the correlation with that variable).


However, the strongest argument for one-way causality
(from commodity growth exposure to the variable of in-
terest) is theoretical. The variable under consideration is
almost always unlikely to have an impact on commodity
growth exposure in the same year. For instance, it is un-
likely that the money stock has an instantaneous effect
on commodity growth exposure, and in this case two-
way causality is safely ruled out. Similarly, it is also un-
likely that FDI has a direct impact on commodity growth
exposure in the same year (though an effect after several
years is more plausible). These are substantive (rather
than statistical) arguments to interpret the conditional
correlations in Table 4.1 as reflecting causal effects.


As Table 4.1 presents partial correlations, Table A.2.2 to
A.2.4 below present the full regression results and speci-
fication for the following dependent variables: (i) foreign
financial assets as a share of GDP (percentage change),
(ii) debt service as a share of GDP (%), (iii) growth rate of
GDP per capita and (iv) change (year-on-year difference)
in the real effective exchange rate (REER).


Periods 1995–2002 2003–2009


Income groups Bottom 40 per cent Top 60 per cent
Bottom 40 per


cent Top 60 per cent


Commodity growth exposure -0.043 0.042*** 0.093*** -0.007
0.036 0.013 0.026 0.008


GDP per capita ($) 0.001 0 0.001 -0.000**
0.001 0 0.002 0


GDP per capita growth rate (%) 0.018* -0.003*** -0.006 -0.001
0.009 0.001 0.011 0.001


Life expectancy (years) -0.099 -0.024 -0.066 -0.023
0.099 0.049 0.13 0.048


Gross capital formation/GDP -7.124 -2.5 13.202 -5.723
12.344 4.34 14.138 4.101


Interest rate (%) -0.04 -0.047** 0.121 -0.002
0.064 0.02 0.154 0.073


REER (LCU/FCU) 0.056** -0.065*** 0.009 0.002
0.022 0.015 0.062 0.023


Debt/GNI 0.018 0 0.02 -0.020*
0.013 0.012 0.02 0.011


FDI/GDP 0.107 0.218*** -0.101 0.02
0.266 0.066 0.258 0.085


Non-primary sectors/GDP -0.03 -0.097*** -0.027 -0.05
0.052 0.037 0.071 0.039


Net food exports/GDP 13218.072* 13988.126** 10538.36 -12100
7584.287 6553.464 14127.27 8400.232


(Constant) 9.311 18.398*** -1.184 9.444
7.523 4.652 9.084 6.114


N 76 157 56 155
Sources: UNCTAD secretariat calculations, based on World Bank, WDI database.
Notes: Standard errors are in italics. One, two and three asterisks indicate a coefficient’s statistical significance


for p=0.1, p=0.05 and p=0.01 respectively. All models are estimated assuming panel-specific
heteroskedasticity. N: denotes sample size.


Table A.2.2. Dependent variable: share of foreign financial assets in GDP




137


cHapter IV: indiRect effects of the Recent commodity boom


Table A.2.3. Dependent variable: logarithm of share of debt service in GDP
Periods 1995–2002 2003–2009


Income groups Bottom 40 per cent Top 60 per cent
Bottom 40 per


cent Top 60 per cent


Commodity growth exposure -0.004 0 0.007* -0.001
0.004 0.001 0.004 0.001


Life expectancy (years) -0.013 0.008* -0.027 0.038***
0.01 0.005 0.017 0.006


Gross capital formation/GDP 1.129 -2.249*** 0.936 -2.848***
0.905 0.428 2.125 0.632


Interest rate (%) 0.011* 0.001 0.017 -0.021**
0.006 0.003 0.02 0.01


REER (LCU/FCU) -0.002 0.001 -0.018** -0.005*
0.002 0.002 0.008 0.003


Debt/GNI 0.008*** 0.010*** 0.013*** 0.015***
0.002 0.001 0.002 0.002


FDI/GDP -0.019 0.003 0.029 0.017*
0.015 0.006 0.035 0.009


Non-primary sectors/GDP -0.004 -0.016*** 0 0.003
0.006 0.004 0.011 0.006


Net food exports/GDP 3080.950*** 1746.042** 2159.755 -161.525
736.99 771.841 1700.484 788.027


(constant) -3.082*** -2.594*** -3.999*** -5.293***
0.784 0.426 1.198 0.842


N 76 157 56 155


Sources: UNCTAD secretariat calculations, based on World Bank, WDI database.
Notes: Standard errors are in italics. One, two and three asterisks indicate a coefficient’s statistical significance


for p=0.1, p=0.05 and p=0.01 respectively. Both GDP per capita levels and GDP per capita growth
are omitted as they enter all models with zero, an insignificant coefficient. All models are estimated
assuming panel-specific heteroskedasticity. N: denotes sample size.


Periods 1995–2002 2003–2009


Income groups Bottom 40 per cent Top 60 per cent
Bottom 40 per


cent Top 60 per cent


Commodity growth exposure 0.987** 1.301* 0.087 3.982***
0.428 0.718 0.203 0.73


GDP per capita ($) -0.01 0.013* 0 0.024***
0.014 0.008 0.011 0.007


Life expectancy (years) 2.209 -1.235 0.112 -3.79
1.346 4.081 1.591 4.17


Gross capital formation/GDP 264.119** 912.188** 93.693 772.704***
107.555 356.607 124.35 257.503


Interest rate (%) -0.528 -8.909*** 2.36 -11.261**
0.6 1.825 1.579 5.173


REER (LCU/FCU) -0.174 -2.559*** -0.675 -3.979***
0.211 0.877 0.617 1.305


Credit/GDP -4.440*** -1.501*** 0.849 -1.691**
1.686 0.573 1.775 0.721


Debt/GNI 0.214 -0.63 -0.431*** -3.157***
0.217 0.694 0.14 0.873


FDI/GDP -2.59 6.571* 2.134 15.826***
2.159 3.569 1.805 5.402


Foreign assets/GDP -0.523 -3.350** -0.362 -0.266
0.404 1.625 0.376 1.228


Non-primary sectors/GDP 0.873*** 1.7 0.476 2.703
0.333 2.618 0.436 2.789


Net food exports/GDP -2.39e+05** 2781.861 -136000 9.10e+05*
101000 373000 90715.14 483000


(constant) -123.341 305.289 22.406 724.390*
84.501 335.297 121.165 410.444


N 76 157 56 155
Sources: UNCTAD secretariat calculations, based on World Bank, WDI database.
Notes: Standard errors are in italics. One, two and three asterisks indicate a coefficient’s statistical significance


for p=0.1, p=0.05 and p=0.01 respectively. All models are estimated assuming panel-specific
heteroskedasticity. N: denotes sample size.


Table A.2.4. Dependent variable: growth rate of GDP per capita (2005, PPP-corrected dollars)




138


COMMODITIES AND DEVELOPMENT REPORT


Periods 1995–2002 2003–2009


Income groups Bottom 40 per cent Top 60 per cent
Bottom 40 per


cent Top 60 per cent
Commodity growth exposure 0.092 -0.057** 0.157*** 0.002


0.068 0.024 0.053 0.009
GDP per capita ($) 0.002 0 0.002 0


0.003 0 0.002 0
GDP per capita growth rate (%) 0.009 0.005*** -0.004 0.006***


0.012 0.001 0.016 0.001
Life expectancy (years) 0.184 -0.069 -0.318* -0.190**


0.178 0.065 0.163 0.083
Gross capital formation/GDP -76.210*** 4.482 -2.549 -7.946


22.394 6.062 19.732 6.79
Interest rate (%) 0.250** 0.086* -0.109 -0.188*


0.121 0.047 0.298 0.113
REER (LCU/FCU) 0.064 0.078** 0.414*** 0.254***


0.049 0.036 0.132 0.044
Debt/GNI -0.028 0.005 0.027 -0.058**


0.024 0.015 0.025 0.023
FDI/GDP 0.801* 0.121 0.44 0.308***


0.433 0.075 0.373 0.117
Non-primary sectors/GDP 0.099 -0.135** -0.171*** 0.061


0.095 0.057 0.061 0.052
Net food exports/GDP -16200 13890.145 24668.188 -7542.655


12729.87 8478.682 15582.986 11303.344
(constant) -22.746 5.489 -10.214 -14.597*


14.099 6.989 14.63 8.741
0.092 -0.057** 0.157*** 0.002


N 0.068 0.024 0.053 0.009
Sources: UNCTAD secretariat calculations based on World Bank, WDI database.
Notes: Standard errors are in italics. One, two and three asterisks indicate a coefficient’s statistical significance


for p=0.1, p= 0.05 and p=0.01, respectively. All models are estimated assuming panel-specific
heteroskedasticity. N: denotes sample size.


Table A.2.5. Dependent variable: change in real effective exchange rate




139


NOTES


1. Gross capital formation (formerly gross domestic investment) consists of outlays on additions to the fixed assets of the economy
plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, etc.); plant, machinery,
and equipment purchases; and construction of public infrastructure (roads, schools etc.). Inventories are stocks of goods held
by firms to meet temporary or unexpected fluctuations in production or sales.


2. However, this could be pursued in future analyses to further enrich the research regarding the impacts of Dutch disease.


3. Heteroskedasticity refers to unequal variance in the regression errors. For example, where the standard deviations of a variable
monitored over a specific amount of time is non-constant.


4. Available at http://data.worldbank.org/data-catalog/world-development-indicators.


5. In the sample of CDDCs, 14 transition economies are included. Summary statistics of this data set are presented in appendix 1.


6. This chapter presents and discusses unweighted sample averages.


7. According to the classification by the World Bank`s WDI, “manufacturing” includes mining and public utilities; thus it may
overstate the extent of transformation away from the primary sector (agriculture and extraction).


8. In this chapter, 2002–2003 marks a structural break in the time series, both for commodity price trends and structural variables.


9. Given the large changes in relative income positions over the period 1995–2009, the set of countries in each quintile may vary
over time. The bottom (top) quintile for year x always contains the lowest-income (highest-income) economies in year x, but
not necessarily in other years.


10. The GDP deflator is an economic measure that tracks the cost of goods produced in an economy relative to the purchasing
power of the dollar. It measures inflation over time, similar to the consumer price index.


11. The HIPC Initiative aims to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries.
Assisting these countries in achieving the MDGs requires the freeing up of additional resources, which the MDRI aims to do by
providing full debt relief for some countries.


12. The analysis presented in this chapter covers the period before the global financial crisis caused a significant increase in the
public debt of many developed and developing countries.


13. The REER is the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several
foreign currencies) divided by a price deflator or index of costs (2005 = 100) in a given year.


14. Foreign asset accumulation followed the same upward trend in poorer countries but was less than half the rich country level,
which was 30 per cent of GDP in 2009.


15. FDI in the poorest quintile of economies was around 4 per cent of GDP in 2005, compared with the richest quintile economies
which registered a rise to 8 per cent in 2005, and stabilized thereafter.


16. In creating the year-on-year growth variable the observation for the first year (1995) in the time series drops out.


17. The Syrian Arab Republic, for instance, experienced large food price rises and consequent food riots in early 2008, but these
consumer impacts were different from the impacts on the structure of its economy and on its financial sector or its foreign
financial position. With a commodity dependence of 0.81, but average annual growth of commodity revenues of only 8 per cent,
this country is similar to Gabon, and scores 6.9 on our commodity growth exposure index, which puts it only in 70th place in
the rankings (see appendix 1).


18. It should be noted that for five CDDCs in the sample, we report a negative commodity growth exposure. Thus a negative
growth (i.e. decline) in commodity revenues times a positive share of commodities in total exports results in a negative value for
commodity growth exposure. It appears that these five countries did not benefit from the boom in term of increased commodity
revenues (see appendix 1).


19. Declining shares of social spending in GDP are not merely due to high GDP growth rates; spending in dollar terms was also
observed to decline more in countries with high commodity growth exposure.




140


COMMODITIES AND DEVELOPMENT REPORT


20. Including health and education variables was attempted, but this greatly reduced the number of observations. Note that most
of the variations in life expectancy are between countries.


21. In response to the crises of 1998 and 2009, IFIs, such as the Basel Committee, the OECD, the Financial Stability Forum (FSF),
the IMF and World Bank, have promulgated sets of international standards to regulate market behaviour (Claessens et al.,
2003; UN Commission of Experts on Reforms of the International Monetary and Financial System, 2009). Also, since 2009
there have been many calls for developing countries to be better represented in international financial organizations (UN
Commission of Experts on Reforms of the International Monetary and Financial System, 2009). The G20, even though it includes
representation of developing countries, unlike the G8, still constitutes a club restricted to large and rich countries. Recognizing
that this institutional reform process may be slow, the report of the UN Commission of Experts on Reforms of the International
Monetary and Financial System (2009) focused on regional arrangements that many developing countries have begun to
consider as an alternative option in case of failure to reform the global system.


22. These investment vehicles absorbed much of these countries’ commodity revenues, and used them for investing in international
financial markets. See table 3, which provides a list of developing and emerging countries with SWFs and their assets.


23. Since the REER is a measure of the value of a reserve currency against a weighted average of several foreign currencies
(multiplied by a deflator), a decrease in the REER signifies appreciation – fewer local currency units have to be given up for
one foreign basket unit.


24. Sterilization refers to the issuing of public debt by a central bank or treasury with the aim of absorbing excess liquidity (money
supply) due to a surplus of foreign exchange. Some developing countries have followed such a strategy to meet tight inflation
targets rather than to support the domestic development of productive capacities (Papadatos, 2009).


25. Akyüz (2008) argues that reserves impose costs only if they are derived from borrowing rather than from trade revenues.


26. See Extractive Industries Transparency Initiative at: http://eiti.org/.


27. UNCTAD (2009b) notes that South-South FDI in overseas land for agricultural production is primarily driven by food security
concerns and remains in a cyclical upswing. The scale of some of these investments is large and controversial, as they have
the potential to disrupt existing patterns of land use and production structures in the host countries.


28. For most of the nineteenth and twentieth centuries across sub-Saharan Africa, land laws have tended to protect private
property, but have largely limited this to land with registered titles. For example, it is estimated, that in Africa formal tenure
covers only 2–10 per cent of the agricultural land (Deininger, 2003: xxi; Deininger and Byerlee, 2010).


29. See Deininger and Byerlee (2010).


30. For a detailed discussion on how to reduce the vulnerability of an economy to Dutch disease in a context of increased aid flows,
see UNCTAD (2006, especially pages 35–61).


31. A weighted least squares (WLS) type estimation was used, where each country (panel) is allowed to have its own error
structure, and the weights are constructed by STATA so as to maximize fit. The analysis covered the period 1995–2009, which
was then divided into two parts: 1995–2002 and 2003–2009; a panel regression was then estimated for each of the sub-
periods. The estimated model draws on Newey WK and West KD (1987). A simple, positive semi-definite, heteroskedasticity
and autocorrelation consistent covariance matrix, Econometrica 55, 703–08.


32. Including health and education variables was attempted, but this greatly reduced the number of observations. Note that most
variation in life expectancy is between countries.


33. The results of regressions excluding commodity dependence mostly increased the size and significance of the coefficient for
commodity growth exposure.


34. Greater plausibility of causation may be obtained by more advanced estimation methods, such as accounting (controlling) for
commodity growth exposure with an exogenous variable or estimating lagged models. But this introduces other problems (of
instrument validity and a reduction in the number of observations, respectively), and is generally insufficient to rule out the
main problem of endogeneity.





Chapter 5:


PERENNIAL PRObLEMS,
NEw ChALLENgES AND SOME


EVOLVINg PERSPECTIVES


1. Perennial problems, new challenges and some evolving perspectives .....................................................142


1.1. Mainfindings ..............................................................................................................................142


1.2. Severed link between higher export prices and domestic income growth ....................................143


1.3. Broad policy perspectives ............................................................................................................144


2. Development strategies and reform of the international architecture .......................................................145


References .........................................................................................................................................................150




142


COMMODITIES AND DEVELOPMENT REPORT


1. PERENNIAL PRObLEMS,
NEw ChALLENgES
AND SOME EVOLVINg
PERSPECTIVES


Commodities are at the centre of the development
process. Their production sustains the livelihoods
of billions in the developing world, and they consti-
tute essential inputs for a wide range of human and
economic activities. Commodities are also an eco-
nomically crucial resource for developing countries,
providing export revenues and sustaining public
expenditure. They continue to account for over half
of most developing countries’ total merchandise ex-
ports in value terms. Therefore, major changes in in-
ternational commodity markets have a direct impact
on the economic performance of these countries and
on the well-being of their populations.


Early economic theories, going back to Adam Smith
and David Ricardo, predicted that the differences
between commodity production and manufacturing
would result in a gradual improvement in the terms
of trade for commodity producers over time. Simi-
larly, early development economists saw commodity
production as the engine of growth and diversifica-
tion for most developing countries that possessed
relatively abundant land and labour endowments.


These expectations have mostly failed to materialize.
Terms of trade for commodity exporters have gener-
ally deteriorated over the long term. Moreover, with a
few notable exceptions, commodity dependence has
been associated with poor economic performance,
and in some cases, civil conflicts and political insta-
bility. This commodity problem, as it has come to be
known, has been attributed to a number of different
factors. Falling terms of trade over a long period
have been ascribed to structural differences in the
labour markets of exporters of primary commodity
and manufactures, among other factors that contrib-
ute to keeping commodity price increases low rela-
tive to those of manufactured products. Historically,
commodity markets have also been prone to cycles,
with short periods of boom giving way to relatively
longer periods of bust. Beyond the medium- to
long-term evolution of the terms of trade of these
products, and the cyclicality of commodity markets,
there are a number of factors associated with the
macroeconomic challenges involved in managing
windfall commodity revenues, which partly explain
the disappointing economic performance of CD-
DCs. Moreover, the detrimental effects of commodity
dependence on development are closely related to
economic vulnerability caused by an often excessive
reliance of these countries on commodities as the
main conduit for participating in world trade, result-
ing in their high degree of exposure to shocks and
the persistence of a poverty trap.


Following decades of largely stagnating or falling
prices, most commodities experienced rapidly ris-
ing prices from about 2003. This report has sought
to establish the different ways in which this price
boom affected CDDCs, and has examined these
effects with reference to established theories con-
cerning commodities and economic development.
Overall, the rise in prices should have translated
into increased export earnings for CDDCs (direct im-
pacts). Provided the macroeconomic effects of these
inflows were well managed, this windfall revenue
should have helped CDDCs meet their development
priorities (indirect impacts). However, the empirical
evidence reviewed in this report suggests that the
overall impact of the commodity price boom has
been limited. This necessitates a re-examination
of the commodities and development nexus to bet-
ter reflect the current global context. In particular,
how can the link between higher commodity prices,
growth in the real sectors, and therefore sustained
growth in incomes, be established or restored?


1.1. Main findings
Among developing countries, the direct impacts of
rising commodity prices between about 2003 and
2011 varied widely based on the composition of the
exports and imports of each country. Some develop-
ing countries, and especially those that are net fuel
and food exporters, saw their terms of trade improve
in the six years leading up to 2008. Several other de-
veloping countries, however, suffered a deterioration
in their terms of trade. These included many of the
poorest countries. Indeed, although they export other
primary commodities, CDDCs are often net food and
fuel importers. For some of them, the increase in
the prices of the tropical agricultural products that
make up the bulk of their exports was not sufficient
to compensate for the increase in the import costs
of food and fuel. The concrete outcome for these
countries was a severely worsening trade balance,
while their populations had to bear the higher costs
of food and fuel.


The causes of the commodity price boom have been
as complicated as some of its effects, such as the
financialization of commodity markets, growth in
developing-country markets of high-value agricul-
tural commodities, supply and demand imbalances
and climate change, among others. Among the most
widely discussed causes has been the diversion of
land and resources from food and animal feedstock
production to fuel production, which has had the
effect of pushing up food prices. For example, as a
proportion of world maize consumption, ethanol use
has increased sharply since 2003/04. But this is
an immediate factor mainly in the maize (or corn)
market, and so tends to have the greatest impact on
food prices in those CDDCs where maize is the pre-


The detrimental
effects of


commodity
dependence


on CDDCs are
their high degree


of exposure to
shocks and the
persistence of a


poverty trap.


The overall
impact of the


commodity price
boom has been


limited.


Some developing
countries, and


especially those
that are net fuel


and net food
exporters, saw


their terms of
trade improve


during the period
2002-2008.




143


cHapter V: peRennial pRoblems, new challenges and some evolving peRspectives


dominant staple food. Also, despite concerns raised
about the potential impact of Chinese demand for
commodities, this report shows that during the pe-
riod 2005–2010 China’s share of world imports was
significant for several “hard” (mineral) commodities,
but relatively small for most “soft” (agricultural) com-
modities. The “China effect” was therefore strongest
in some of those commodities where prices rose the
most, such as iron ore, copper and oil, but negligible
in cereals and other arable crops (with the notable
exception of soya).


However, the initial period of steadily rising commod-
ity prices, including basic food commodities, placed
the food security of poor households under stress
and caused severe social unrest in several countries.
It has been estimated that the food price crisis of
2008 caused an additional 119 million people to ex-
perience hunger, pushing the world total above the
billion persons mark. This was followed by severe
price volatility for many commodities during the pe-
riod 2008–2011, over and above the usual volatility
of commodity prices, which has posed a tremendous
macroeconomic management challenge for all CD-
DCs. Such volatility makes it difficult for farmers and
other suppliers to take optimal production decisions
and serves as a disincentive for investment.


Beyond these direct effects, there are a number of
indirect effects of the recent commodity price boom
on CDDCs. These effects capture the nature and
magnitude of the impact that the changes in rev-
enue have had on various economic variables in
these countries.


Overall, there is some indication that greater rev-
enues from commodity exports led to moderate in-
come growth, and that the effect was not limited to
the agricultural sector; the manufacturing and ser-
vices sectors also exhibited stronger growth rates.
However, the respective shares of these two sec-
tors in overall GDP fell due to a much higher growth
rate of the primary sector. Therefore, the commod-
ity price boom does not appear to have promoted
economic diversification. Indeed, there is a paradox
in expecting income growth from higher commodity
prices to stimulate such change unless it is invested
in strategic sectors, since diversification would help
make economic growth less dependent on the com-
modities sector. It is therefore a difficult balancing
act to prevent a strong commodity sector from build-
ing itself up and inhibiting the growth of other sec-
tors. This is the essence of the Dutch disease, which,
when combined with bad governance, can become a
resource curse – a conundrum for economic devel-
opment and policymakers.


Nonetheless, the fact that other sectors do not ap-
pear to have been negatively affected suggests that
countries were able to avoid the Dutch disease ef-


fects that can accompany windfall revenues. This
conclusion is strengthened by the finding that,
overall, there was no evidence of exchange rate ap-
preciation in CDDCs. One of the factors explaining
the lack of appreciation pressure, in spite of CDDCs’
increased revenues, is that these revenues appear
to have been used largely for accumulating currency
reserves, and for investing, particularly in foreign as-
sets, notably through SWFs (in the richer countries
in this category), as well as to meet external debt
obligations. There was evidence of some debt reduc-
tions in the poorest countries as well as increased
foreign investments after 2002, although part of the
reductions in debt could probably be explained by
the Multilateral Debt Relief Intiative that succeeded
the HIPC debt relief initiative. The channelling of
commodity revenues to international financial mar-
kets may have reduced pressures on the exchange
rate, but this was at the cost of domestic spending
and investment. This trade-off is particularly notice-
able in the poorest developing countries. For many of
them, the commodity price boom translated into only
modest income growth and limited social and eco-
nomic development. Indeed, spending on education
even declined in this group of countries over the pe-
riod 2003–2009. Moreover, for these countries the
impact of the commodity boom was mainly evident
in the large increases in their import bills, especially
for food and fuel. Thus, the increased revenues gen-
erated by their exports of primary commodities did
not greatly benefit their populations.


1.2. Severed link between
higher export prices and
domestic income growth


The tendency for countries to favour the reduction
of external debt and accumulation of foreign assets
over domestic spending and investment is strongly
linked to the finance-driven globalization that has
defined the past few decades. As international
capital flows increased and developing countries
were advised by donors and IFIs to liberalize their
capital accounts, the economic stability of these
countries began to depend increasingly on their
ability to attract capital from abroad. Indeed, even
during the commodity price boom the level of ex-
port revenues was dwarfed by that of net external
financing, so that it was the capital account rather
than the current account that determined coun-
tries’ financial stability. Such financial stability has
come to be seen as a prerequisite for growth, and
explains why many countries have sought to ac-
cumulate foreign reserves at the cost of domestic
real-sector investment. This is an aspect of the fi-
nancialization of the world economy and of current
development thinking that was unimaginable to the
pioneers of development thought in the middle of
the last century.


The initial period
of steadily rising
commodity
prices, including
basic food
commodities,
placed the food
security of poor
households
under stress and
caused severe
social unrest in
several countries.


In the poorest
developing
countries, the
commodity
price boom
translated into
modest income
growth as well
as limited social
and economic
development.




144


COMMODITIES AND DEVELOPMENT REPORT


It is remarkable that the same logic of financial de-
regulation and the expansion of the role of finance
in the development process also underpins many of
the tendencies noted in the international commod-
ity markets over the past decade. Since 2000, with
the bursting of the dot-com bubble in the United
States, there have been enormous inflows of capital
into commodity markets. As noted in this report, this
rapid financialization of these markets has contrib-
uted to rising prices, and especially to amplifying the
volatility of commodity prices since 2003.


Finance-driven globalization does not appear to be
associated with a process of industrialization and
structural change (UNCTAD, 2011a). Thus there
is need for a radical rethinking of the role of com-
modities in the development process. In the current
context, and in the absence of corrective measures,
CDDCs, especially the poorest ones, suffer from the
high price volatility of commodities, while they are
unable to benefit from increased revenues from
commodities, as the link between higher export
prices and income growth (via growth in the real
domestic sector) has been severed. The prevailing
theories which suggested that commodities could be
an engine of growth for developing countries, pro-
vided the adverse macroeconomic effects of windfall
revenues could be managed, may not fully apply in
this new global context. The conceptualization of the
commodities problem needs to be revisited to better
take into account the constraints facing CDDCs due
to finance-driven globalization.


1.3. broad policy perspectives
The recent commodity boom and its consequences
for CDDCs also suggest a number of broad policy
considerations. In the last couple of years, there has
been increasing attention, particularly within the
framework of the G20, to the issue of how to respond
to the commodity problem discussed here. The inter-
agency consultation process launched during the
French presidency of the G20 in 2011 (and which
is continuing under the current Mexican presiden-
cy of the Group) to discuss this issue and identify
policy directions brought together 10 international
organizations, including UNCTAD. This section does
not intend to reiterate the conclusions or recommen-
dations that have emerged from this process, nor
comment on recent work on the issue (e.g. Farooki
and Kaplinsky, 2012). Rather, it identifies some of the
policy options that emerge directly from the discus-
sion in sections 1.1 and 1.2 above.


First, the excessive influence on commodity markets
of trading motivated by financial, not commercial,
considerations should be curbed, at least for some
key commodities. This can be achieved through
a number of financial market regulations, some of
which are already being implemented. These include


measures aimed at ensuring greater transparency
and stability in futures trading, such as margin re-
quirements and position limits. Other possible meas-
ures could be the imposition of price variation ceil-
ings to prevent excessive price fluctuations over a
given trading period.


At the national level, developing countries should
seek a better balance between using their revenue
in a way that improves their financial stability and
investing it in the domestic economy for economic
and social development. This requires that external
debt levels and fiscal balances be kept at a sustain-
able level to maintain financial stability, while using
some revenues for domestic investment, particu-
larly in real sectors, in line with overall social and
economic development objectives, and to stimulate
domestic demand.


CDDCs should also seek to retain more of the end
value of the commodities they produce. For minerals
and fuels, this entails, among other things, revising
their existing investment and/or mining regimes, in-
cluding putting in place a more equitable and effi-
cient taxation system for their extractive industries.1
Many countries have already implemented such
reforms following their growing confidence derived
from the fact that the extractive sector may have be-
come a “sellers’ market”, in the sense that power
has switched to the sellers’ side, which means the
sellers can dictate prices and other terms (Kay, 2011;
Verma, 2011). The bargaining power of producing
countries has therefore increased for the first time
since the 1970s, as reflected particularly in the iron
ore and copper markets (UNCTAD, 2011b; UNCTAD,
2012a). There are several options open to countries
to take advantage of this situation, including the
introduction of progressive taxation on profits, dif-
ferentiated production taxes and export taxes. The
policy choice should take into account the admin-
istrative and auditing capacities of their authorities.


In the case of agricultural commodities, countries
can help by supporting their producers to improve
their bargaining power with the international value
chains in which they participate. The best way
to achieve this is to promote collective action by
producers, notably through the establishment of
cooperatives, farmers’ associations and market-
ing boards. The development of market-based in-
stitutions, such as warehouse receipt systems and
physical commodity exchanges, could also enable
farmers to get better prices for their produce. Simi-
larly, greater market transparency and the use of risk
management strategies could transform small-scale
informal agricultural undertakings into more effi-
cient agricultural enterprises with increased profit
margins. Countries could also seek to promote lo-
cal processing of commodities in order to retain
more value added, although this latter solution is


Finance-driven
globalization does


not appear to
be associated


with a process of
industrialization


and structural
change in CDDs.


The excessive
influence on
commodity


markets of trading
motivated by
financial, not
commercial,


considerations
should be curbed,


at least for some
key commodities.


CDDCs should
seek to retain


more of the
end value of the


commodities they
produce.




145


cHapter V: peRennial pRoblems, new challenges and some evolving peRspectives


becoming more difficult as a result of the increasing
complexity and internationalization of value chains.
However, as noted by Farooki and Kaplinsky (2012),
a critical choice for commodity-exporting countries
is not to give in to “manufacturing pessimism” (i.e.
allowing commodities to undermine manufacturing),
but to shape policies that permit them to make the
most of their commodities. It is still important for
these types of economies to try to diversify towards
manufacturing and services, particularly within the
context of “the stepwise deterioration in real non-oil
commodity prices with each super cycle, the mean
being lower than the previous one” as observed by
Erten and Ocampo (2012: 23).2


In order to avoid a repeat of the severe food crisis of
2008, poor countries also urgently need to establish
some form of food reserve. As outlined in this re-
port, the precise nature of these schemes can vary
considerably according to local specificities. A mix
of different instruments operating at different levels,
such as local food storage backed by regional re-
serves, offers a good compromise. Alternatively, or
in addition, a virtual reserve – a notional commit-
ment to stabilize prices – could perhaps be set up
at a regional level, in particular because the costs
involved are much smaller relative to physical buffer
stock management. This should be combined with
strengthened protection for the most vulnerable and
food-insecure segments of the population. Food
security cannot be left to economic policy alone; it
also requires social measures to provide the poorest
families with the means to purchase food. Recent
experience in several countries shows that this can
be achieved relatively rapidly and at low administra-
tive costs through a combination of cash payments
along with support for local markets and communi-
ties.


2. DEVELOPMENT
STRATEgIES AND
REfORM Of ThE
INTERNATIONAL
ARChITECTuRE


At the very least, the commodities boom has pro-
vided a welcome breathing space for CDDCs. How-
ever, whatever may be the future level of commodity
export prices, their volatility has greatly increased
over the past 10 years. But as stated above, it is not
apparent that much diversification to national econ-
omies has occurred to reinforce the windfall gains
to GDP from higher export prices. It remains to be
seen whether the price boom indicates a long-term
upturn in commodity prices or is merely the latest
in an intermittent series of exceptionally large cycli-
cal upturns, to be followed by years of depressed
prices. Perhaps coincidentally, these big cycles have
occurred at 30-year intervals, the last big spikes


in commodity prices having taken place in the late
1940s and in the 1970s.3


The essential development problem facing CDDCs is
one of excessive reliance on exports to traditional
markets. A country’s commodity dependence im-
plies a certain inability to control its destiny because
of a reliance on markets for types of goods which
are traded on global markets. It often reflects a high
degree of economic vulnerability and evidence of
limited diversification and structural transformation
due to enduring problems of price volatility, and in
particular due to non-tariff barriers to trade and to
an excessive level of market concentration. Such
a situation concerns countries that have nothing
to trade except primary commodities, and in most
cases tends to be an abiding inheritance from the
colonial era. At that time, these countries’ economic
structures were developed to serve the needs of the
colonial powers. This was especially true in Africa,
due to this continent’s late integration into the global
economy and the character of its transformation
which was initiated in the late nineteenth century
by the European colonial powers. Tentative efforts to
remedy this after independence were aborted by the
experience of the 1980s debt crisis and structural
adjustment in the 1980s and 1990s (UNCTAD, 2007).


This explains the continuing dependence of so many
of the poorest countries on global commodity mar-
kets – a dependence that has actually increased un-
der globalization, in two ways:


• Far from resolving the commodities problem for
development, globalization has in effect com-
pounded it. It has become an issue not just re-
lated to the export side of the poorest countries’
trade but also to the import side. CDDCs have
developed a growing dependence on imported
commodities, especially cereals, fuels and the
other inputs required by contemporary intensive
agricultural practices. The price boom therefore
had severe negative consequences for most de-
veloping countries because of the impact of the
global price shock on domestic food prices and
the profitability of domestic agriculture.


• Due to financial deregulation, it has become
increasingly difficult to use higher commodity
revenues to generate self-sustaining domestic
economic growth and long-term social develop-
ment, as discussed above.


The combined food, fuel and financial crises of
2008 therefore marked a turning point in the eco-
nomic situations of CDDCs, just as much as the
more widely discussed financial crisis which has
affected the developed countries. The problem has
been exacerbated by the financialization of the com-
modity markets, one aspect of which has been the
increasing involvement of new actors, such as finan-


A critical choice
for commodity-
exporting
countries is not
to give in to
“manufacturing
pessimism”, but
to shape policies
that permit them
to make the
most of their
commodities.


The essential
development
problem facing
CDDCs is one of
excessive reliance
on exports
to traditional
markets.




146


COMMODITIES AND DEVELOPMENT REPORT


cial players and traders, in commodities markets.
This is a consequence of the slow shift in the pric-
ing mechanisms of these markets, from long-term,
fixed contracts to methods that create very sharp
price fluctuations and therefore attract players who
are motivated exclusively by financial gain. To quote
the report of the Cannes B20 Business Summit, “In
such markets, the importance of financial products
grows exponentially, typically reaching gross vol-
umes more than ten times that of the underlying
physical markets. Trading volumes on the London
Metal Exchange (LME) are between 20 and 30 times
greater than physical production.”4 The historically
low interest rates since 2009 seem to have added
to this process and contributed further to price rises.


Partly because of the importance of the new “twists”
to the commodity problem and the associated influ-
ences spreading from North to South, there needs to
be direct input from representatives of all develop-
ing countries, and not only the G20, in resolving this
problem. After all, it is the poorest countries that
have tended to be the worst affected by both high
and volatile commodity prices. And yet, after the cri-
ses of 2008, when the commodities issue became
an important item on the international agenda, de-
bate on potential policy responses was led by the
G20. This group is more inclusive than the G8, as
it includes emerging countries, such as Brazil and
South Africa, and only India and Indonesia out of
the 66 low-income food-deficit countries. However,
none of the world’s poorest countries, whether the
48 LDCs or the 35 defined by the World Bank as low-
income countries, are represented. Future policy on
trade in international commodities needs to consider
the views of those countries whose economies are
the most affected by that trade. This suggests that
among the existing global country groupings the G77
should be directly involved, as well as regional or-
ganizations from the South. The considerable com-
modities-related expertise at the United Nations, es-
pecially at UNCTAD, FAO and the Common Fund for
Commodities, could also provide significant input.


The situation also implies a need for at least some
degree of reconfiguration of CDDCs’ trade away
from the current system based on unimpeded global
markets over whose institutions they have little in-
fluence. Many countries in East and South-East Asia,
the most successful subregions of the developing
world, increasingly rely on their own subregions as
a source of economic demand and transformation.
They have benefited from the impetus provided by
the earlier industrial breakthroughs of neighbouring
countries – first Japan, then the Republic of Korea
and the other newly industrializing economies of the
1980s, and more recently China and other, smaller
countries in the region. However, the greatest con-
centration of CDDCs is in Africa, which do not benefit


from any local growth poles of industry and finance
such as those of China and Japan. What can be
done to substitute for them?


In this new context, it is necessary to rethink de-
velopment strategies in order to maximize the gains
to developing countries from the commodities trade,
while drawing lessons from the unfulfilled promise
of the commodities and development nexus which
experts had forecast over the past 60 years. The
following three lines of strategy are recommended
for the CDDCs’ consideration, together with certain
changes in the international architecture that would
be required to realize them:


1. Prepare for the possibility of falling commodity
prices and a consequent decline in export incomes,
government revenues and economic demand.


2. Rely on neighbouring countries’ potential ability
to generate autonomous economic development
away from the pressures imposed by commodity
dependence.


3. Harness the income gains from higher commod-
ity prices to facilitate wider economic transfor-
mations and a reduced dependence on com-
modities.


These are discussed in more detail below.


1. Prepare for the possibility of falling commod-
ity prices and a consequent decline in export
incomes, government revenues and economic
demand.


Whatever may be the general level of commod-
ity prices in the future, volatility itself constitutes a
serious danger. It benefits nobody except hoarders
and speculators, who make profits on price move-
ments. Developed countries now share an interest in
addressing price volatility, as they have experienced
higher inflation as a result of the commodity price
boom and might themselves seek ways to moder-
ate prices. For example, it was recently suggested
that developed countries’ central banks might wish
to take positions on commodity markets in order to
influence price movements, which would assist their
task of controlling domestic inflation.5 While central
banks are not recommended here as the best agents
for this kind of task, it should be possible to draw
on both the public and private sectors, which have
considerable experience, accumulated over many
decades, in smoothing out prices at critical points
along agricultural and mineral supply chains. This
can take different forms, such as using physical or
virtual stocks, controlling production and trade, and
marketing arrangements, depending on the goals
sought to be achieved and the possibilities provided
by each market and value chain.


The best known model, which lasted from the 1930s
until the 1990s, was that of international commodity


The emergence
of new “twists” to


the commodity
problem requires


the direct
engagement of


all developing
countries in its


resolution.


Developed
countries now


share an interest
in addressing
price volatility,
as they have
experienced


higher inflation
as a result of the
commodity price
boom and might
themselves seek


ways to moderate
prices.




147


cHapter V: peRennial pRoblems, new challenges and some evolving peRspectives


agreements (ICA), which were periodically negoti-
ated between the leading exporting and importing
countries. Overall, the ICAs were ultimately consid-
ered unsuitable, partly because of their one-size-
fits-all nature in an area of the economy which is
notable for the great diversity of its price formation
systems and its patterns of supply and demand.
Although many ICAs did achieve considerable suc-
cess and might still be suitable for certain markets,
no such prescriptive model is recommended. Each
market and value chain needs its own particular type
of arrangement or measures aimed at providing the
greatest gains for participants in each case.


The architecture required for this task suggests
a central role for international commodity bodies,
which can research the kinds of market reforms that
will provide the best possible defence against price
volatility in each particular case, without giving any
initial preference to one type of reform or another.
The United Nations can play a wider role in develop-
ing innovative thinking in this area and coordinat-
ing efforts at reform on individual commodity value
chains.


To provide urgent relief in the event of an import
price shock, a related reform could be the establish-
ment of a global countercyclical financing facility to
support food-insecure countries, particularly LDCs.
It should be able to rapidly disburse the funds it
would have at its disposal because of the emergency
nature of such needs. For the same reason, policy
conditionality should be low and there should be sig-
nificant concessionary elements. This would provide
an important complement to an expanded system of
food reserves, as recommended below.


2. Rely on neighbouring countries’ potential to en-
able economic development that is not subject to
pressures imposed by commodity dependence.


Intraregional trade can generate mutual gains for
neighbouring countries that are at similar levels of
development. This can avoid the problems that arise
on global markets, of remoteness from final demand
and the difficulties of market entry (as opposed to
the formal possibility of market access), due, for
example, to technical requirements such as rigid or
very high quality standards. The intraregional ap-
proach thus helps countries to develop domestic
businesses and accumulate capital domestically – in
other words genuine, autonomous economic devel-
opment. Over the past 50 years such mutual trade
arrangements among countries at similar levels of
development have benefited members, as in the EU,
and, more recently, countries in East and South-East
Asia. The growth of intraregional trade could enable
countries to reduce the impact of global economic
shocks such as the importation of food price inflation
from commodity markets. It could also help to stimu-


late strong domestic and regional food and agricul-
tural markets, the existence of which has provided
an assured basis for economic activity in developed
countries since the middle of the twentieth century.


In general, both public and private investment needs
to be increased with the aim of boosting agricultural
productivity and correcting the structural causes of
food insecurity. The FAO has estimated that over $80
billion a year in additional investment is needed in
developing countries to solve the problem of food
insecurity by 2050. Most of that will have to be from
the private sector, but in many developing countries
the initial push is likely to be from the public sec-
tor. Public investment can crowd in private sector
investment in upstream and downstream activities
such as supplying storage, transport and other facili-
ties for food production.


At the same time, it would be useful to reduce reli-
ance on the main globally traded crops (maize, rice
and wheat), which have transmitted price shocks
even in countries that had broadly secure food sup-
plies. It is advisable to revive the production of other
staple foods and to diversify agriculture more gener-
ally on nutritional and ecological as well as commer-
cial grounds. It is also necessary to reduce imported
inputs for agriculture, such as mineral fertilizers and
oil, by adopting agroecological methods which do not
use up scarce foreign exchange. In support of this,
investment is needed in agricultural technology to
raise food production levels in developing countries,
including increased public spending on research and
development. But the choice of technologies has to
be considered carefully to reflect the specificities of
each country or region.


Climate change is a growing constraint in many of
the most food-insecure countries, for example in the
Horn of Africa and in the Sahel region as well as in
low-lying islands and delta regions in the Indian and
Pacific Oceans. This is another reason for carefully
considering the choice of agricultural technologies.
The United Nations Collaborative Programme on
Reducing Emissions from Deforestation and Forest
Degradation (UN-REDD) is an important mechanism
which seeks to mitigate or overcome this constraint
on agricultural development.8


The following institutions and architecture could be
considered for this purpose:


• The development of stronger regional economic
blocs which adopt harmonized policies and
standards, common external tariffs and prefer-
ential trade arrangements.


• An increased share in domestic and regional
budgets for implementation of agricultural and
food policies. The African Union could press
harder for its members to allocate 10 per cent of


To provide urgent
relief in the event
of an import price
shock, a related
reform could be
the establishment
of a global
countercyclical
financing facility
to support
food-insecure
countries,
particularly LDCs.


The growth of
intraregional
trade could
enable countries
to reduce the
impact of global
economic
shocks such as
the importation
of food price
inflation from
commodity
markets.




148


COMMODITIES AND DEVELOPMENT REPORT


their domestic budgets to agriculture – a target
that was set in the 2003 Maputo Declaration.
Both the continent-wide Comprehensive Africa
Agriculture Development Programme (CAADP)
and domestic policies would be considerably
strengthened if there were matching joint poli-
cies at the regional level in Africa – as is already
happening in the area of food reserves. A simi-
lar goal is desirable in food-insecure CDDCs on
other continents, if it does not exist already.


• In support of this, the creation of regionally
based agricultural development banks or agen-
cies that would pool the resources of member
States to facilitate proactive agricultural policies
is recommended. Alternatively, existing regional
development banks, including the African Devel-
opment Bank, could allocate a minimum level of
their loan portfolio (5 or 10 per cent) to agricul-
tural development. A global agency should also
be set up, either separately or under the aus-
pices of the FAO, to explore and coordinate new
approaches in agricultural and food policy based
on a revival of traditional cultures and the de-
velopment of agroecology. It should work closely
with farmers’ and farm workers’ organizations,
especially regional ones such as the East African
Farmers’ Federation and the Network of Farm-
ers’ and Agriculture Producers’ Organizations of
West Africa (ROPPA), as well as global ones, no-
tably the International Federation of Agricultural
Producers and the International Union of Food
(IUF) secretariat.


• Research should focus on developing agroeco-
logical methods, especially those that apply to
tropical agriculture and food production. This
should be undertaken by leading international
institutions such as the International Institute of
Tropical Agriculture (IITA), the World Agroforestry
Centre and the World Vegetable Centre. The
research work should be matched by a revival
of agricultural extension, with an emphasis on
farmer-to-farmer methods that facilitate the re-
tention and adaptation of traditional knowledge
relating to crops, production techniques and
pest control – in other words, supporting the
revival of long-established tropical methods for
tropical agriculture. This will help reduce reli-
ance on imported fuels, mineral fertilizers and
agrochemicals.


• Regional policies for food reserves should help
safeguard food security against the challenge of
any future global food price shocks. The recent
initiatives of the ASEAN+3 group and ECOWAS,
discussed in chapter 3, provide contrasting
models, both of which are well adapted to the
specific conditions of their own regions.


• In contrast to agricultural commodities, price
movements of energy, minerals, metals and
ores tend to be determined by demand, and are
closely linked to global industrial and economic
activity. UNCTAD (2012b) has proposed, inter
alia, that the G20 explore the feasibility of a base
metals market information system to encourage
information sharing, improve data reliability, and
enhance data analysis and market transparency.
There are already some intergovernmental com-
modity bodies, such as the three international
study groups on copper, nickel, and lead and
zinc, based in Lisbon, that have mandates to
increase market transparency by promoting the
exchange of information.9


In developing this architecture it would be necessary
to consider its compatibility with existing interna-
tional trade disciplines under WTO rules and agree-
ments and elsewhere, including possible reforms of
those rules where appropriate.


3. Utilizetheincomegainsfromhighercommodity
prices to facilitate wider economic transforma-
tions and a reduction of dependence on com-
modities.


This more traditional approach offers potential in two
areas:


• Development of downstream commodity pro-
cessing and commodity-related industries; and


• Stimulation of wider domestic trade and new
economic sectors, including manufacturing.


These goals are necessary for development, whether
the commodity boom continues or not. But the extra
incomes provided by the boom provide an oppor-
tunity to finance such development. Indeed, many
countries which have benefited from oil exports in
recent decades have attempted similar strategies,
with varying degrees of success. As discussed in this
report, this process has also proved difficult for CD-
DCs during the recent boom. Nevertheless, there are
several examples of countries, including Botswana,
Malaysia, Mauritius, and particularly in recent years,
Brazil, which have advanced as a result of commod-
ity exports, and lessons can be drawn from their ex-
periences. The new “architecture” or set of institu-
tions recommended to support this strategy consists
of the following:


a. The establishment of economic development
agencies alongside regional trade blocs, such
as the Caribbean Community (CARICOM), MER-
COSUR, SAARC, and others which cover various
subregions of Africa (e.g. the African Union, East
African Community, ECOWAS and SADC). Eco-
nomic development strategies could then be
pursued hand-in-hand with the development
of regional trade, as discussed earlier. The re-


Research
should focus


on developing
agroecological


methods,
especially those


that apply
to tropical


agriculture and
food production.


Regional policies
for food reserves


should help
safeguard food
security against


future price
shocks.


The G20
should explore


the feasibility
of a base


metals market
information


system to
encourage
information


sharing, improve
data reliability,
and enhance
data analysis


and market
transparency.




149


cHapter V: peRennial pRoblems, new challenges and some evolving peRspectives


gional agricultural development agencies rec-
ommended above could form part of these wider
agencies or be separate from them, in view of
the special importance of resolving the food and
agricultural problems.


b. UNCTAD draws on nearly 50 years of experience
in linking economic development with trade
and, in particular, the commodities sector. It is
therefore well placed to act as the lead global
agency to provide guidance and coordination for
this process.


c. Revisit commodity-specific mechanisms which
can assure exporting countries of a stable and
sufficient share of the income earned along
commodity value chains. This is a separate
issue from the moderation of price volatility,
discussed above. Such mechanisms might tie
CDDCs to particular commodities in the short
term, but with the benefit of ensuring adequate
export incomes, which can then be more easily
mobilized to plan for economic diversification in
the longer term. An example of a country which
made good use of such extended support for its
main commodity export is Mauritius: It benefited
from over 50 years of export guarantees for sug-
ar under the EU-ACP Sugar Protocol and, before
it, the former Commonwealth Sugar Agreement.


d. Research and coordination in this area could
be undertaken by the respective international
commodity bodies, which already collate sta-
tistics and undertake other forms of coordina-
tion between participants in commodity chains,
and have a sound knowledge of the specifics of
the individual chains and associated commodity
markets.


The proposed new architecture calls for some degree
of reconfiguration of CDDCs’ trade away from the
current system based on unregulated global markets
over whose institutions they have little influence. It
would require a much stronger role for regional eco-
nomic blocs, and regionally based agricultural de-


velopment banks or agencies, which together with
other regional institutions could formulate economic
development strategies based on: (i) the develop-
ment of downstream commodity processing and
commodity-related industries; and (ii) stimulation
of wider domestic trade and new economic sectors,
including manufacturing. At the international level,
this new architecture envisages a greater and more
coordinated role for the G77 (in addition to the G20),
regional organizations from the South, and United
Nations institutions that have considerable expertise
on commodities issues, especially UNCTAD, FAO,
and the Common Fund for Commodities, as well as
international commodity bodies.


Convincing the national and international commu-
nity of the need for some of the policy measures
discussed so far will not be easy, in particular be-
cause of well-known practical difficulties that were
encountered in previous attempts to achieve similar
goals. However, the persistence of the problems of
commodity dependence during the past three dec-
ades suggests that markets have not been able,
and cannot be expected, to solve the problem alone;
and perhaps more than other markets, commodity
markets need a helping hand. Commodity cycles
and price volatility are inherent aspects of commod-
ity production and trade and will not disappear, no
matter how desirable this might be. The commodity
problem will continue into the future, in particular
considering recent developments in global financial
markets. It is now time to get all stakeholders in-
volved in trying to find ways and means of coping
with this problem. The problems are practical in na-
ture and the search for solutions should consider all
possible avenues, with no ideological preferences or
preconceptions of what constitute the “right” meth-
ods or outcomes. It is only in this spirit that solutions
will be found that could enable the majority of CD-
DCs to make the most of the cyclical and occasion-
ally highly volatile commodity markets which are so
important to their economic growth and to the secu-
rity of livelihoods for their people.


The proposed
new international
architecture
envisages a
greater and more
coordinated role
for the G77 (in
addition to the
G20), regional
organizations
from the
South, and UN
commodity
related
institutions.


The persistence
of the problems
of commodity
dependence
issues during
the past three
decades
suggests that
markets have
not been able,
and cannot be
expected, to
solve the problem
alone.




150


COMMODITIES AND DEVELOPMENT REPORT


refereNces


Erten B and Ocampo JA (2012). Super-cycles of commodity prices since the mid-nineteenth century. DESA Working Paper
No. 110ST/ESA/2012/DWP/110, United Nations, New York.


Farooki M and Kaplinsky R (2012). The Impact of China on Global Commodity Prices. Oxford and New York, Routledge.


Kay C (2011). Africa’s choices widen while the world scrambles for resources; available at: http://www.businessday.co.za/articles/
Content.aspx?id=147941.


Lines T (2007). Supply management: Options for commodity income stabilization. Geneva, International Institute for Sustainable
Development; available at: www.tomlines.org.uk/userimages/LinesSupply_managementIISD.pdf.


UNCTAD (2007). EconomicDevelopmentinAfrica:ReclaimingPolicySpace–DomesticResourceMobilizationandDevelopmental
States. United Nations publication, sales no. E.07.II.D.12. New York and Geneva, United Nations.


UNCTAD (2011a). Development-ledGlobalization:TowardsSustainableandInclusiveDevelopmentPaths. Report of the Secretary-
General of UNCTAD to UNCTAD XIII. New York and Geneva, United Nations; available at: http://www.unctad.org/en/docs/tdxiii_
report_en.pdf.


UNCTAD (2011b). The Iron Ore Market Report 2010-2012. (UNCTAD/SUC/2011/4). Geneva; available at: http://www.unctad.info/en/
Infocomm/News/The-Iron-Ore-Market-2010-2012/.


UNCTAD (2012a). Recent Developments In Key Commodity Markets: Trends and Challenges. (TD/B/C.I/MEM.2/19). Geneva, United
Nations.


UNCTAD (2012b). Excessive commodity price volatility: Macroeconomic effects on growth and policy options. Contribution
of the UNCTAD secretariat to the G20 Commodity Markets Working Group. Available at: http://unctad.org/meetings/en/
Miscellaneous%20Documents/gds_mdpb_G20_001_en.pdf.


Verma S (2011). Guinea, George Soros and re-distributing the resource wealth of nations. Financial Times Tilt, 7 March; available
at: http://tilt.ft.com/#!posts/2011-03/15101/guinea-george-soros-re-distributing-resource-wealth-of-nations-2.


NOTES
1. This is already happening to some extent; for example, Zambia has increased its mining royalty rates for base metals and


precious metals from 3 and 5 per cent, respectively, to 6 per cent for both (Financial Times, Special Report, 9 February 2012).


2. These authors are aware that manufactures, especially of the low-technology variety, are not immune to worsening terms of
trade, but believe that the high price elasticity associated with them more than compensates for any such declining trend.


3. See chapter 2, for a discussion of the two more recent major price upturns.


4. G20 (2011), available at: www.b20.fr/uploads/presse/Final-Report-with-with-appendices-B20-2011.pdf: A55-A56 (accessed
March 2012).


5. See FT Alphaville blog, 19 March 2012, ‘A call for central bank action on commodity prices’, at: , http://ftalphaville.ft.com/
blog/2012/03/19/929081/a-call-for-central-bank-action-on-commodity-prices/.


6. For a full discussion of this topic, see Lines (2007).


7. The importance of compensatory financing to address African commodity problems, in particular, was acknowledged in General
Assembly resolution 46/151, paragraphs 31-32, at the 46th session, 18 December 1991.


8. For information on UN-REDD, see: www.un-redd.org/AboutREDD/tabid/582/Default.aspx.


9. In addition, UNCTAD produces an annual Iron Ore Market Report and Statistics.




COMMODITIES AND
DEVELOPMENT REPORT


U n i t e d n at i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t


Perennial problems, new challenges and evolving perspectives


C
O


M
M


O
D


ITIE
S


A
N


D
D


E
V


E
LO


P
M


E
N


T R
E


P
O


R
T


P
e


re
n


n
ia


l p
ro


b
le


m
s


, n
e


w
c


h
a


lle
n


g
e


s
a


n
d


e
v


o
lv


in
g


p
e


rs
p


e
c


tiv
e


s
UN


CTA
D


UNITED NATIONS


Printed at United Nations, Geneva – GE.13-50101 – March 2013 – 865 – UNCTAD/SUC/2011/9




Login