Alfred Maizels Commodities in Crisis: The Commodity Crisis of the 1980s and the Political Economy of International Commodity Policies (Oxford, Clarendon Press, 1992).
by Michael Kevane
Commodities in Crisis tries to persuade the reader of the necessity for increased intervention in international markets for primary commodities like tin, sugar, coffee, cocoa, and wheat. The author believes that this regulation could best be carried out by the Common Fund, an international body established in 1989 within the UNCTAD framework. The Common Fund has two objectives: to support international commodity agreements designed to stabilize commodity prices, and to promote diversification of economies dependent on primary commodity exports. Maizels would add a third: to provide compensatory financing for countries suffering adverse demand shocks for primary commodities. All of these activities require much more money than has so far been pledged by Common Fund member nations (the United States refused to join), explaining the need for persuasion.
Because Maizels leaves a number of theoretical and empirical questions unexamined, most economists will be skeptical of his call for more intervention. The book nonetheless remains an excellent introduction to the issues. Maizels presents his arguments concisely and without obfuscation, allowing counter-arguments a fair shake. The writing is fast-paced, never tendentious. The breadth of the book should make it useful reading for students of development and international economics, as well as international political economy.
Maizels starts with a disturbing fact. During the 1980s commodity prices declined precipitously-- thirty-five percent by one estimate. This fall would not be problematic if the costs of extraction and production were also falling, or if productivity were rising. The resulting shift in the supply curve would explain the fall in price, but income would be rising and there would be no need for international action to 'remedy' the price decline. Unfortunately for the developing countries, this was not the case. According to Maizels, much of the price fall was due to a reduction in demand occasioned by three processes: 1) the slowdown in the developed countries, particularly Europe; 2) the 'dematerialization' set in motion when the oil price hikes of the 1970s raised incentives for developing synthetics and new industrial engineering techniques; and 3) the semi-forced increase in LDC exports as international creditors pressed for repayment of their loans.
The fall in prices has consequently translated into a fall in potential LDC income. Maizels quantifies these losses by comparing the value of annual exports when deflated by a price index of manufactured goods exported from developed countries, with the value of annual exports when deflated by an index of commodity export prices. The slow rise in prices of manufactured goods and the steady decline in commodity prices made commodity exports less valuable. Coupled with the expansion of export volumes, the result was a 'gap' amounting to roughly $30 billion annually by 1988. That is, if manufacturing prices had remained constant, and export prices had not fallen, the increase in exports would have yielded $30 billion more to the developing countries. This number may exaggerate the 'lost income': LDC's import primary commodities, and so also benefit from the fall in commodity prices- especially oil prices, and manufacturing price indices overestimate price rises because they do not adequately reflect quality improvements. Nevertheless, the back of the envelope calculation conveys an adequate sense of the order of magnitude involved. Maizels argues that it is comparable to the amputated capital flows of the pre-debt crisis years, and thus justifies serious reconstructive surgery.
Raising depressed prices would also stabilize prices, providing additional justification for international action in commodity markets. Maizels summarizes an extensive body of econometric literature that demonstrates a negative relationship between instability and growth. He also reviews the macroeconomic arguments of Keynes and Kaldor, who believed that commodity price instability was central in explaining developed country inflation. Many economists dismiss these macroeconomic benefits, yet the idea seems less far-fetched in today's world where Federal Reserve Board members propose tying monetary policy to commodity price indices.
Maizels does not seek to persuade mainstream academic economists. The canonical work by Newbery and Stiglitz is not even cited. Perhaps he ignores them because he suspects that international policymakers-- his intended audience-- also ignore them. Maizels seems to be assuming that the same arguments that western policymakers use to rationalize their domestic interventions (commodity producers are vulnerable to price and income fluctuations, the fluctuations have deleterious effects on other sectors of the economy, and the market allocation of resources and R&D works to the disadvantage of commodity producers) could be used in the international policy arena and bring about the same result, a redistributive income transfer, for the developing world.
Indeed, he goes further, arguing that it is precisely the domestic interventions of the industrial countries that create the necessity for international intervention. Escalating tariffs deter primary commodity exporters from moving up the processing chain. Farm subsidies, price supports and import quotas make the 'free' world market more unstable. Internal taxes and tariffs, especially for tropical beverage products, substantially reduce demand and encourage substitutes. Maizels's rhetorical conclusion is sharp: either dismantle your domestic apparatus of protection or compensate the adversely affected developing countries. In the final analysis, however, Maizels makes no attempt to measure the costs and benefits of alternative policies, strategies or programs. His discussions of Western protection, subsidies for synthetics and transnational oligopolies provide nice overviews, but not compelling justifications for strengthening the Common Fund, resuscitating international commodity agreements, expanding compensatory financing, and creating a new Third World currency. His eagerness to set off for a new continent armed with incomplete navigational charts and flawed compass is the major weakness of the book. Concentrating on the empirical and theoretical ramifications of alternative policies might have elevated the book from a reasonable programmatic overview to an exceptional contribution. Several of these overlooked issues come to mind.
First, wide variation in domestic policies and productivities makes developing countries competitors rather than allies in commodity markets. New mineral deposits and the adoption of new crops and varieties have shifted market shares. The rapid growth of Malaysian cocoa and palm oil sectors is a case in point. This heterogeneity is plainly central to explaining variable patterns of vulnerability caused by the overall price decline.
A second and related point is that Maizels offers no discussion of LDC domestic political economy that might be responsible for this variation. This omission is serious because one might reasonably argue that the countries most hurt by the price decline were those that dissipated early advantage through rent-seeking and political contests of attrition that delayed necessary public investments (Sudan's cotton and gum arabic sectors, and Côte d'Ivoire's cocoa sector, come to mind).
Third, it is far from apparent that international institutions best reduce vulnerability to price fluctuations. For small-holder agriculture- like tea, coffee, cocoa and sugar production- farmers themselves can smooth out price and supply variability through savings and informal insurance. Recent work testing this hypothesis suggests that it has considerable merit. For mineral producers, futures markets and commodity bonds might achieve the goal of sharing risk in an efficient and decentralized fashion.
Fourth, the years since the book was written have seen a reversal of the net outflow of capital from LDC's. On pp. 41-42 Maizels agrees with studies that calculate a need for flows of up to $60 billion per year in order to finance 'socially necessary growth', and argues that private sources are unlikely to meet this need. Yet in 1993 more than this amount was invested in Latin America alone. This potential for massive private capital inflow undermines the position that compensatory financing is a vital and necessary activity for the Common Fund, and also makes it more difficult to dismiss the neo-liberal view that 'official' compensatory financing can delay, rather than hasten, the domestic policy reforms that countries need to undertake before international capital markets respond.
Finally, one must consider the success of speculative attacks, such as that which caused the collapse of the European fixed exchange system. A well-stocked Common Fund might rapidly become a global piņata, with international arbitrageurs standing in line to take a whack. When the tin, cocoa, coffee, sugar and wheat come spilling out of failed international commodity agreements, might not donors and producers alike rue the party?