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Africa: Commodity Trap

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

Editor's Note

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

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

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

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

United Nations Conference on Trade and Development (UNCTAD)

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

UNCTAD/PRESS/PR/2004/003

February 26, 2004

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

Caught in a commodity trap

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

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

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

Trickle-up economics

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

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

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

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

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

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

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

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

For more information:

http://www.un.org/publications.
:
UNCTAD Press Office
T: +41 22 917 5828; E: press@unctad.org
or
Kamran Kousari, Special Coordinator for Africa,
T: +41 22 917 5800; E: kamran.kousari@unctad.org


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

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

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

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

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

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

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

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

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

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

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

The present state of play

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

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

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

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

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

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


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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