Commodity Dependence

from Africa Focus

How Corporatization Squeezed Out Producers?

Excerpts from the statement made at the joint South Centre-Action Aid side event at UNCTAD XII in Accra. 19 April 2008

By Dede Amanor-Wilks

The joint Action Aid-South Centre report can be downloaded from: http://www.southcentre.org/publications/CommodityReport/AA_SC_Commodity_Report.pdf

We are living in a confusing time in the history of commodity markets. Commodity prices are currently high. Yet producers in Africa and other parts of the developing world do not seem to be benefiting from these high prices. Instead, they are crying out for protection.

It has been reported that in Asia, food prices rose by 70% during 2007. If the rise in food prices that we are now experiencing in Africa is being driven by the quest of the industrialised North for new sources of fuel, namely biofuels, then the implications for food production are potentially terrifying.

To illustrate this point - currently, Ghana's total production of oil palm is nowhere near sufficient to meet the demand of the industrialised North for palm oil for the manufacture of bio fuels. This means that if the prices being offered are raised to attract palm products away from the Ghanaian market and towards bio fuel producers in the North, there would be no palm oil left for Ghanaian consumers. In a country like Ghana, where most people prepare food with palm oil and other palm products almost every day, that would be unthinkable. Yet if we do not act, this is what is likely to happen.

The Three Features of Commodity Markets

The recently released joint Action Aid - South Centre report "Commodity Dependence and Development: Suggestions to tackle the commodities problem", at an UNCTAD XII pre-event in Accra explains how dependence on a few primary products seals and perpetuates poverty. It draws attention to three features of commodity markets that will keep those that are dependent on commodities poor forever. First is the unpredictability of international prices. Second is the belief that over the long term, prices of primary commodities go down (in relation to prices of finished goods or goods to which value has been added); and third, there is a tendency towards concentration of production in just a few hands, internationally.

On the first point, the report says:

'Commodity price fluctuation is anathema to economic development for commodity-exporting developing countries: it translates into export earning fluctuations. These in turn lead to fluctuations in domestic income, savings and in government revenues. As a result there is an adverse effect on domestic investment in productive as sets. Therefore....the report says.... 'Commodity price volatilities lead to macroeconomic instability, which is detrimental to economic development.'

This is the macroeconomic instability that we are seeing all over Africa. One of the biggest sins of the neo-liberal paradigm - the gravest errors of judgement in the so-called Washington Consensus - was to advise African countries to do away with their state marketing boards. Many Asian countries managed to avoid the crisis currently facing African agriculturalists because they did not fall into the debt and structural adjustment trap, and because the state refused to withdraw from taking the lead in development.

But in Africa, the IMF and World Bank told African producers to get rid of state marketing boards and that agriculture would flourish. The state is kleptocratic and parasitic; the state is a vampire. So let us throw the state out of development and without these parasitic marketing boards, we would all be better off. Yet what we are seeing is that in countries where the marketing boards have been privatised, producers are in trouble.

Historically, the marketing boards were established during the colonial period, ironically, to protect African producers from the price crash during the great depression of the 1930s. They were further strengthened to protect African producers from the effects of World War II. In the settler colonies, the marketing boards were usually set up by settler farmers themselves.

In countries where these marketing boards have now been abolished in the names of structural adjustment, liberalisation and fair trade, we are seeing a worrying picture. Producers have been left without state protection and are defenceless in international markets, which favour the strong. Yet our producers are weak. No wonder then that countries like Senegal, that liberalised their groundnuts sector, are facing a crisis. It is the crisis of overdependence on a narrow band of commodities.

The joint Action Aid - South Centre study is a cautionary tale about the effects of trade liberalisation on sensitive African commodities.

In relation to the Senegalese experience, during the 1960s, groundnuts were seen as the engine of the Senegalese economy. With structural adjustment in the late 1970s - Senegal was one of the first countries in Africa to liberalise - groundnuts production began to decline as the government's support to farmers by way of inputs, fertilizer and technical support started to decline. The final step of liberalisation came in 1996 when state marketing of groundnuts was privatised. Liberalisation has seen a rise in prices, yet Senegalese farmers do not seem to benefit from these rising prices as trade monopolies have become a feature of the sector.

No wonder then that Senegal's President, Abdoulaye Wade has emerged as a vocal champion of the Stop-EPAs campaign. Unlike Ghana, Senegal has refused to sign the Economic Partnership Agreement (EPA) despite tremendous pressure from the European Union, to which in West Africa Ghana, Cote d'Ivoire and Cameroon have succumbed.

Corporate Concentration: Profits over Producers

The worst aspect of the removal of state marketing boards is that market power has been transferred to private hands. This resulted in market concentration. The report draws attention to the quickening pace of concentration in the hands of a few processors, traders and retailers.

In 1994, 80% share of the global pesticides market was in the hands of 12 companies. By 2002 just six companies controlled the same share. By that time just two companies controlled 65% of the world's maize seed market.

In relation to food manufacturing and processing, the report says that two companies controlled close to 60% of the world market for roasted and instant coffee in 2002. Currently, three companies control 85% of the world's tea market.

In Africa, the effects of such corporate concentration are being felt in different ways. Let us consider the case of a very African example, coffee, which was first given to the world by Ethiopia. Of 23 robusta producing countries, 17 are African. Yet the large supplying countries are currently in Asia and Latin America. During the 10-year period from 1995 to 2005, Africa's share in global coffee exports fell from 14% to 7%. For LDCs as a whole, the share fell from 9% to 5%. In the 1970s, exporting countries retained a mere $5 for every $10 of coffee exported. By 2006, they retained just 20%.

Corporate concentration has changed the nature of commodity markets. Corporates are unlike the state marketing boards, which were the buyer of last resort (and this means that they had a duty to buy grain or cocoa or coffee or groundnuts from the last producer on the margin of the last region in a country). By contrast, the companies that now rule the market in countries where the state marketing boards have been abolished think only about company profits and not the economic development of poor producers.

There is a strong positive correlation between dependence on primary agricultural commodities and poverty. What it means is that as long as we are dependent on primary agricultural commodities, we will always be poor.

There is no country in the world that grew rich on agriculture alone. We in Africa cannot be an exception to this economic truth. The industrialised North grew rich because of the industrial revolution in Britain 200 years ago. This was quickly imitated in all the countries of Western Europe. When we look at the more recent experience of East Asia, South-East Asia and South Asia, we can confirm that it is the added value through manufacturing processes that separates the rich countries from the poor.

So when agricultural commodity production is concentrated in a few hands, it means that those who are already rich will get richer, and those on the margins will be further squeezed out. They will never have the opportunity to build up their cash income, or to diversify their sources of income, or to add value to their products.

This is not a major surprise. The tendency towards monopolies is a fact of economic life that is well known to economists. That is why in the industrialised countries you find institutions that regulate the growth of monopolies. In developing countries on the other hand, these institutions are not well developed. It is for this reason that we need to have an institution like UNCTAD that insists on having the market regulated on behalf of poor producers and not rich producers.

Need to Defend Policy Space of UNCTAD

Commodities crisis is forcing the question of commodity pricing back onto the international agenda. Let us recall briefly the history of UNCTAD. The first Secretary General of UNCTAD was Raul Prebisch, a renowned Argentinian economist. During the 1950s, Prebisch belonged to the school of structural economists that spawned the dependency theory. Dependency theory, which argues that a small core of rich countries keep the bulk of peripheral countries in a dependent relationship, was popular until the 1970s. It has been out of fashion with mainstream economists since the era of structural adjustment from the 1980s.

However, the pendulum seems to be swinging again. It is evident from testimonies by representatives of farmers' movements and by individual producers of poultry products, rice, groundnuts and shea butter. Some of the stories are desperate. African farmers are not benefiting from the current high prices. They are facing unfair competition from an overwhelming influx of illegally subsidised imports. Their States seem unable to prevent this onslaught. They are being forced to play by the WTO's rules. Yet they are being squeezed out of business by powerful forces that appear to follow their own rules.

There is a need to recall the ideals of the original advocates of international trade. The classical theory of international trade was developed by giants like Adam Smith and David Ricardo. It is not usually remembered that Adam Smith was a passionate defender of the rights of the poor. He pointed out the folly of beggar-thy-neighbour policies.

By contrast, the neo-classical ('neo-liberal') paradigm that informs mainstream economists today seems to have no such concern. In pursuing free market policies, that sound good in theory but in practice are only free on one side of the poor-rich divide, we are creating the conditions for a global, social and political catastrophe.

What we are sensing today is a moral outrage that the game is not being played fairly. That the rich industrialised North has set the rules of the game, but instead of holding its producers accountable to those rules, it is distorting markets in their favour. Meanwhile, African producers whose governments have accepted to play by the rules are losing out.

UNCTAD is still one of the international spaces where we expect serious attention to be paid to the cause of producers in developing countries. We cannot give up this space.

We need UNCTAD to be strengthened for the enormous task of defending the rights of farmers in developing countries to a fair share of the market. Given the terrible constraints facing producers in developing countries, the space occupied by UNCTAD is the space we want to defend. This is our understanding of the situation facing producers in developing countries who wish to trade their goods with consumers in developed countries on terms that are transparent and fair and that do not encourage the rise of monopolies.

As there do not seem to be any strong initiatives on behalf of commodity producers in developing countries, UNCTAD must take steps to strengthen institutions of producers in developing countries.