Global economic crisis, commodity prices and development implications [ ATN12, Accra, August’09 ] Michael Herrmann Economic Affairs Officer Macroeconomics and Development Policies UNCTAD, Geneva, Switzerland

This presentation Recent trends in commodity prices Medium-term outlook for commodity prices Addressing instability of commodity prices Sizing opportunity of commodity boom –Extractive industries –Agricultural sector Conclusion

Recent trends in commodity prices: Effect of global economic crisis

Medium-term outlook for commodity prices: Demand likely to recover Population growth remains high, especially in developing economies –High demand for staple foods, and other commodities. Economic growth will recover, especially in emerging economies –High demand for agricultural goods, metals, minerals, ores, oil. Household incomes will rise, especially in emerging market economies –Rising demand for meat, and stable foods that serve as fodder. –Rising competition over scarce agricultural land. Biofuel use will rise, especially in developed economies –Rising demand for agricultural goods that serve as biofuel –Rising competition over scarce agricultural land.

Medium-term outlook for commodity prices: Supply likely to remain sluggish In extractive industries (metals, minerals, ores and crude oil), exploration has often been put hold, exploitation requires time. –Supply is likely to respond only slowly to rising demand. In agricultural sector (agricultural raw materials and food), expansion of production is limited, intensification of production requires time. –Supply is likely to respond slowly to rising demand

Addressing instability of commodity prices

Rational for international commodity policy –High prices are bad for consumers/ importers (revenues). –Low prices are bad for producers/ exporters (price push). Shortcomings of international commodity agreements –Limited focus on promoting higher prices (no price ceilings). –Management is difficult (collective action problems). Shortcomings of insurance schemes –Focus on income stabilization (price volatility not addressed) –Limited use by small producers (complex instruments). Diversification of economic activity –Most promising insurance against unstable and falling commodity prices export revenues, and negative economic shocks. Discouragement of commodity speculation –Speculation explains part of the recent commodity price variations.

Sizing the opportunities of commodity boom: Key challenge

Sizing opportunity of commodity boom: Extractive industries Use of mineral rents (much discussed). Governments of resource-rich countries must make better use of mineral rents. –Assurance of transparency, accountability. –Avoidance of corruption. Share in mineral rents (often neglected). Governments of resource-rich countries would benefit from a higher share in mineral rents. –Negotiation of better contracts with (foreign) investors (auctions). –Renegotiating contracts with (foreign) investors (some successes). Linkages with the local economy (often neglected). Resource-rich economies benefit from stronger linkages. –Creation of more and more productive and lucrative employment. –Promotion of knowledge and technology transfer. –Sourcing from local enterprises.

Sizing opportunity of commodity boom: Agricultural sector: Are positive price signals passed on to producers? Pass- through of rising international prices to farm gate depends on –Number of local traders (decreases with distance to main market). –Number of international traders/ retail chains (varies by commodity). –Bargaining power of local producers (rises with output). Can producers respond to price signals? Productive- capacities of producers is often low, owing to –Lack of land reforms/ property rights. –Limited access to credit. –Limited access to know-how and technologies. –Limited capacity to ensure product standards. –Limited capacity to market products. –Constraints on shipping.

Sizing opportunity of commodity boom: Agricultural sector:

Rise of agricultural output has been negatively influenced by –Underinvestment in agriculture by many developing countries (anti- rural bias). –Structural adjustment programmes implemented by low-income countries (decrease of government spending on agricultural R&D and rural infrastructure, down-sizing of development banks, abolition of marketing boards and extension schemes, liberalization of markets). –Trade-distorting agricultural support in many advanced countries (import surges by developing countries). Rise of agricultural output requires –Intensification rather than extension (because limited availability of prime agricultural land, and negative effects of deforestation). –Intensification/ productivity increase requires reversal of past policies (much can be achieved through conventional means rather than bio- tech, organic agriculture has great potential).

Sizing opportunity of commodity boom: Agricultural sector:

Conclusion: Commodity-dependence must not be curse Rethink classical development strategies. Promote diversification in commodity sector. Increasing share in and better use of mineral rents. –Imperative of transparency and accountability (discourage corruption). –Priorities in public spending/ development and poverty reduction strategies (ideally to encourage economic diversification) Development of productive capacities in general. –Access to finance (especially for small and medium-size firms and farms). –Development of infrastructure (in urban and rural areas, especially transport and utilities). –Strengthening of managerial competencies ( –Promotion of enterprise/ sector linkages (vertical/ horizontal integration, transfer/ sharing of know-how and technology). Development of agriculture where feasible. –Implementation of land reforms (large potential to increase productivity on small plots; even larger potential to increase productivity on large plots). –Encouragement of producer associations (transfer/sharing of know-how and technology, joint marketing, joint bargaining).

Conclusion: Rebalancing development priorities and aid

Agriculture research, extension and education: US$ 54 million (0.1% aid) Governance: US$ 1.3 billion (4.2% aid)