Un''s integrated programme for commodities, Managerial Economics

The UN's Integrated Programme for Commodities

Most of the political pressure for ICAs comes from spokesmen for the developing countries.  This is reflected in countless resolutions in UNCTAD and in the grandiloquent mid-70s demands for ' A New International Economic Order', basically a collection of old ideas in a fashionable package.  Stabilization and support for primary commodity prices remains the main objective and ICAs the main mechanism for achieving it.  The only novel features in the UNCTAD proposals for an integrated programme were the  suggestion for a Common Fund for financing international stocks and the simultaneous negotiation of a broad group of ICAs.  The UNCTAD report stressed, 'That years of studies, discussions and consultations in various forums have succeeded in establishing international arrangements for only a few commodities, hardly any of which have proved to be effective or durable.'  Instead of  drawing the conclusions that such a dismal  record might indicate basic flaws in these forms of market intervention UNCTAD demanded urgent negotiations for creating a package of up to eighteen ICAs with buffer socks and a Common Fund without wasting further time in research or consultation.

But of these eighteen commodities three already had existing price control agreements (tin, coffee and cocoa); two had existing and successful producer price raising schemes (bauxite and phosphates); four were unsuitable for buffer stocks scheme either because of the absence of organised markets or perishability (iron ore, bauxite, meats, bananas).  Price enhancement for copper, cotton, iron ore, vegetable oils and oil seeds, sugar and meats was unlikely and inequitable because developed countries produced a large proportion of them, and for rubber, jute, hard fibres and cotton because of the ready availability of synthetic substitutes.  A rather similar appraisal can be found in Rangarajan's book where he says, of the 18 commodities in the list, "the stock mechanism is suitable for four, of which tow already have operating mechanisms and one does not need to be stocked in the near future... it is difficult to avoid the conclusion that the stock mechanism was first chosen as a saleable proposition and the Integrated Programme then fitted around it."

If it is accepted the ICAs are a good thing then there is a case for a simultaneous approach and for the creation of a common fund for stocks.  The attraction of dealing with a large group of commodities simultaneously is that it can have something in it for everyone.  Countries which have interests in some commodities as consumers but in other as producers can offset gains from one agreement against losses on another.  Against this can be set the sheer complexity of the task and tremendous demands that would be created for the simultaneous price increase (since that is the most likely effect of the start of the large number of stockpiles recommended) in a wide range of important imports in unlikely to raise much enthusiasm on their form for such proposals,  it may be possible to give a little  disguised aid in the form of an agreement on sugar or coffee without the electorate noticing what is afoot, but if similar transfers through raised prices are intended for ten or more commodities strong opposition form consumers is very likely.

A common fund for buffer socks offers several advantages.  First, if the market behaviour for some commodities is out of phase with movements in prices of others, some buffer stocks could be selling at the same time as others buying.  These offsetting movements could reduce the overall size of the required fund as compared with the aggregate of individual commodity funds required to achieve the same policy objectives.  If, however, the main cause of instability was cyclical - fluctuations in demand which caused all commodity prices to rise and fall together -this economy in funds would be zero or negligible.

A large single fund might obtain finance on better terms than would several smaller ones.  Lending risks would be pooled and reduced, and dealing in large sums of money would yield some economies of scale.  UNCTAD envisages the buffer stocks as representing investments which could attract funds on a near commercial basis from OPEC members, but this is a very doubtful proposition.  It depends on either rather wide swings between purchase and sale prices or very accurate predictions on the part of the stock managers.  The combination of administrative, brokerage, storage and deterioration costs in stocks tends to absorb a very large part the gross margins between purchase and sale prices making it unlikely that the fund could support high interest charges.

Negotiations for a Common Fund (CF) were eventually concluded in1979.  It was set  up with 'two windows'.  The first is intended to help finance international buffer stocks and international buffer stocks and internationally co-ordinated national stocks.  Its send window will finance such measures as research and development, marketing and diversification.  The financial structure of the CF is envisaged as government contributions of  $470 million of which $400 million is for the first, and $70 million for the second window.  Of the $400 million, $150 million is to be contributed in cash,  $150 million on call and $100 million as on call for backing the Fund's borrowing.  UNCTAD's earlier estimate of $6 billion for stocking the ten 'core' commodities (thought by may to be an underestimate) may be directly comparable to this because of differences in the financial arrangements, but the obvious disparity in size is so huge as to suggest that the CF is unlikely to have any significant impact upon commodity trade instability.

In any case it has often been marked that the main obstacle to ICAs has seldom been lack of finance.  Negotiations have almost always broken down over the issues of the target price and the allocation of quotas.  Even if they could be set up it is not known whether ICAs could succeed in moderating fluctuations in the export prices and revenues of developing countries.  Past experience does not justify optimism.  Nor does the evidence of theoretical and empirical research, including simulation studies, suggest that the task of keeping actual prices within, say, plus or minus 15 per cent of a target price which keeps in touch with long-term trends in supply and demand, is anything but extremely difficult in technical terms, let alone in the real world of clashing interests between producers and consumers and among producing nations.

Posted Date: 11/30/2012 5:09:16 AM | Location : United States

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