8:32 AM Feb 7, 1994

SOLUTIONS VIA MARKET-ORIENTED APPROACHES

Geneva 4 Feb (Chakravarthi Raghavan) -- Existing mechanisms to tackle commodity problems have proved inadequate and problems facing commodity exporting developing countries continue unabated, and the problems of the international commodity economy need to be addressed in the context of market-oriented approaches, according to the UNCTAD Standing Committee on Commodities.

This was one of the agreed conclusions of the Standing Committee which ended Friday.

According to these conclusions "the Committee agreed that problems of the international commodity economy should be addressed in the context of market-oriented approaches, "with a view to achieving a better functioning and enhanced transparency of the international commodity economy, greater diversification of commodity sector in developing and better management of natural resources in order to achieve sustainable development."

Reviewing recent developments in the international commodity economy, the committee noted that the difficulties faced by commodity exporters, specially by developing countries and the least developed countries which are heavily dependent on commodity export earnings continue unabated.

These countries have suffered significant setbacks in the 1980s because of the "very depressed commodity" prices which, in the 1990s, have continued to fall in real terms for most commodities and in nominal terms for many. For a large number of them export values have not expanded significantly and many continue to experience large shortfalls in their commodity export earnings, in a context in which only very limited success had been achieved in efforts of economic diversification.

The committee said many basic problems are due to lack of market access, demand recession and structural oversupply leading to large stock overhangs.

These overhangs have been due to increased productivity in some countries, entry of new and efficient producers, pressure to increase exports as a result of structural adjustment programs and foreign debt service, expansion of metal exports from eastern Europe and, in agricultural commodities, high levers of support to producers in OECD countries.y

Commodity markets are subject to significant distortions that prevent their functioning as optimal allocators of resources. These distortions come from market imperfections, notably imperfect information; barriers to entry and exit; from inappropriate interventions in commodity markets; from externalities, notably environmental; and from difficulties in securing market access.

Existing mechanisms to tackle commodity problems, the Committee said, have proved inadequate.

The Committee however noted some 'positive developments' in producer/consumer cooperation, including in particular the successful negotiation of new agreements on sugar and cocoa, conclusion of negotiations on tropical timber. The Committee also noted efforts at international cooperation for supply rationalization including for a production policy within the Cocoa agreement.

The Committee also noted a substantial degree of consensus on a number of points, but that more research and policy analysis and intergovernmental interactions were needed for consensus building.

The Committee noted that existence of futures markets helped increase transparency of markets.

Governments and those operating in commodity markets, especially in developing countries and countries in transition, the Committee said, needed to become more aware of the potential uses of market-based risk management instruments, and of the risks associated with their use.

In this connection the Committee endorsed the proposals of the Group of Experts on policy areas requiring further investigation and training/advice and urged UNCTAD and the World Bank to continue and intensify their efforts on training/advice/information.

The UNCTAD Secretary-General was also requested to forward the relevant policy proposals of the Group of Experts to responsible authorities within member countries.

The highly technical work involved in this area should be pursued through an Ad Hoc Group of Experts meeting and governments should encourage their public and private sectors to participate in the work of this group.

On compensatory financing questions, the Committee noted the difficulties being experienced by existing facilities -- largely as a result of their having to cope with problems they were not intended to solve when they were set up. These facilities were intended to provide short-term assistance for temporary, reversible shortfalls and not to cope with sustained declines in export earnings due to structural changes.

Distinguishing between cyclical and structural shortfalls were difficult and therefore compensatory financing facilities should be viewed "as but one (short-term) instrument in a range of measures spanning different time horizons", the Committee agreed.

Successful diversification, horizontal or vertical, need several conditions: appropriate national policies, particularly macroeconomic framework, government services and measures to encourage and facilitate active private sector initiatives; liberalized market access, including reduction of tariff escalation; financial and technical support from the international community; and overcoming or removing exit barriers.

The committee agreed to pursue examination of diversification including analysis of national experiences, implications of the results of the Uruguay Round, examination of need for financial and technical assistance and the role of barriers to exit in impeding diversification among private sector commodity producers.

The committee also agreed on a work programme in the area of fostering sustainable development in the commodity field, paying special attention to:

* examination of national experiences in terms of environmental impacts of commodity production, in particular determinants of these impacts and their relationship with economic policies and market conditions, and facilitating the exchange of national experiences;

* collection and dissemination of information on natural products claimed to have environmental advantages with a view to expanding utilization of, and international trade in such products;

* analysis of economic implications of internalization of environmental externalities in commodities and study of possible support mechanisms, particularly at international level, for such internalization;

* inclusion of environmental objectives in international commodity bodies; and

* policies for sustainable development of mineral-dependent economies.

The Committee also expressed its concern over the "dramatic decline of UNDP funding" for UNCTAD commodity technical assistance programs and called for increased voluntary contributions and for new initiatives to identify additional sources of financial and technical support for UNCTAD-executed programs.

During the discussions in the Committee, Argentina for the Latin American and Caribbean Group (GRULAC), had referred to the continued existence of market distortions exerting a negative impact on developing countries. The consolidation of multilateral disciplines in commodities through the Uruguay Round was just a starting point, but its implementation was crucial. In agricultural markets, interventions by the OECD countries (through support which amounted to $354 billion in 1992). UNCTAD had an important role to play in the process of developing multilateral disciplines.

On the commodity/environment/sustainable development links, the GRULA representative said, it was the interventionist policies and subsidizing mechanisms that often led to over-exploitation and ecological degradation.

In terms of UNCTAD's medium-term action in this area, Argentina said that it was necessary to focus progressively its work on elaboration of a set of guidelines to translate the general principles agreed to at Cartegena.

For the African group, Kenya underscored the deterioration in the commodity situation of Africa, and called for the work of the Committee emphasizing more on the specific problems facing Africa.

The African spokesman referred to studies on impact of the Uruguay Round pointed to a loss of $2.6 billion annually for this impoverished region and asked the Committee to undertake an analysis of the impact of the Round on the production, processing and marketing of Africa's commodities.

Philippines for the Asian Group, stressed the need for a coherent global strategy to address the commodity problems which was responsible for the economic malaise in most commodity-dependent developing countries. Given the distortions in resource allocation caused by government interventions in production and international trade (in the industrialized world), the possibility of developing countries improving their performance through adjustment was severely limited.

Debates (on the appropriate policies) should not prolong the hardship and economic distress for the majority of the world's population and it was essential to arrest without delay the enormous decline in real incomes and living standards in many developing countries, the Asian spokesman added.

Greece, speaking for the European Union, suggested that the secretariat studies had not adequate reflected the impact of the CAP reform and the Uruguay Round trade liberalization.

Tanzania stressed that the poor economic performance of highly commodity-dependent LDCs in the 1980s largely reflected the decline in export earnings for their major exports -- due to recession in the industrialized countries (short-term phenomenon), and contracting demand due to technological change as a longer-term development. Any commodity development strategy must address both issues.

On the idea of commodity exporters and countries using market-based risk management instruments (being promoted by the World Bank), Tanzania stressed that exporters and public institutions in LDCs lacked experience and skills needed for their use and the information needed for understanding the price formation process. The Tanzanian delegate also questioned the effectiveness of these instruments without parallel actions aimed at correcting tendency to oversupply.

In other interventions, the United States wanted UNCTAD to stress national, rather than international approaches to commodity problems.

Norway said while all concepts of sustainable development were country specific, commodity-related environmental damage was often due to market failures and policy distortions, exacerbated by persistence of poverty. Hence reforms designed to promote efficiency or reduce poverty would also be beneficial for the environment.

China complained that the cutbacks in tariff and non-tariff barriers on commodities of major export interest to developing countries had fallen far short of objectives of the Uruguay Round. The Commodity problems of developing countries should be more favourably treated.