Global economic crisis, commodity prices and development implications [ presented @ ATN12, Accra, August’09 ]

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

2. 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

3. Recent trends in commodity prices: Effect of global economic crisis

4. Recent trends in commodity prices: Effect of global economic crisis

5. Recent trends in commodity prices: Effect of global economic crisis

6. Recent trends in commodity prices: Effect of global economic crisis

7. 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.

8. 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

9. Addressing instability of commodity prices

10. 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.

11. Sizing the opportunities of commodity boom:Key challenge

12. 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.

13. 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.

14. Sizing opportunity of commodity boom:Agricultural sector:

15. 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).

17. Sizing opportunity of commodity boom:Agricultural sector:

18. Sizing opportunity of commodity boom:Agricultural sector:

19. 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).

20. Conclusion:Rebalancing development priorities and aid

21. Conclusion:Rebalancing development priorities and aid

22. 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)