Monday, April 23, 2012

Trade and Development Reports, 1981-2011 [The defense of UNCTAD]

UNCTAD has released a report looking back at the series of Trade and Development Reports it has been publishing annually since 1981. It boasts that UNCTAD foresaw the mounting influence of globalization on the economies of developing countries, warned of the dangers of unregulated financial flows and volatile exchange rates, and consistently argued – against the free-market orthodoxy of the 1980s and 1990s – that governments have important roles to play in helping national economies achieve steady, long-term progress.The report is being launched during the ongoing UNCTAD XIII in Doha, Qatar.

The first part of the 30-year review publication shows that the originality of the TDR has been rooted in the discussion of national policies and strategies in relation to the performance of the global economy and its institutions. Taking a novel approach to the prevailing discussion on development challenges and policies, the TDR abandoned the dichotomy between short-term macroeconomic issues and long-term development issues that was shaping "development economics" at the time. From the start, the TDR emphasized the importance of the external environment for development. In a way, it anticipated the notion of globalization.

The hallmark "holistic" view of the TDR on policies related to employment, trade, debt, and monetary, finance, and payment balances has been reflected in its analyses on the debt crisis of the 1980s, in its view of the problems created by conditionalities attached to structural-adjustment programmes of the international financial institutions, and in its warnings on the dangers for developing countries of opening to unregulated capital flows and increased exchange-rate instability. More recently, in examining the build up to -- and the macroeconomic impacts of -- the global economic and financial crisis, the report called attention to the weaknesses of international monetary and financial governance and to the deep inconsistencies among global trade, financial, and monetary policies.

The TDR has called for a balance between multilateral rules and actions and national policy autonomy, or "policy space" in economic matters -- a term coined by UNCTAD´s economists. This point of view has enlivened economic debate in recent years. In defending the need to address specific local needs and challenges, the report has been strongly critical of the "one-size-fits-all" approach to development policies often taken by international institutions.

The discussion of the role of the State in economic development, particularly in promoting capital formation for the diversification of economies, has been a recurrent aspect of the TDR. While taking a prudent attitude towards the merits of free markets -- distinct from that of other organizations -- the TDR has never intended to serve as an agent in favour of an "anti-market" ideology. Rather, the 30-year review publication claims, the TDR’s aim has been to promote a well-targeted pragmatism in policy-making. The concern is not "State vs. market" but effective policy vs. what it calls "market fundamentalism." Accordingly, the TDR has tried to help developing countries create what is sometimes called a "developmental State".

Earlier, UNCTAD released a statement strongly defending the role of “developmental state”. It batted for the balanced role of the State and market considerations, where the State designs policies and institutions with a view to achieving sustainable and inclusive economic growth as well as creates an appropriate enabling stable, transparent, and rules-based economic environment for the effective functioning of markets.

The UNCTAD has been under pressure from developed nations for criticizing the finance-driven globalization (FDG) model and calling for an overhaul of the system to move to development-led globalization (DLG). The report, titled "Development-led Globalization: Towards Sustainable and Inclusive Development Paths," suggests that FDG has led to uneven, unstable and unfair outcomes. It outlines an agenda for DLG based on three pillars: enabling developing countries to mobilize domestic resources, strengthen productive capacities and share the gains in an equitable manner; creating more robust multilateral structures for collective responses to upcoming challenges, such as taming finance and promoting investment-led responses to climate change; and strengthening regional ties, including through South–South cooperation, to enhance stability and open new growth opportunities.

Also here is a link to the inaugural Commodities and Development Report (UCDR) 2012.

The report says mounting financial speculation in commodities and the increasing diversion of agricultural land to biofuel crops has changed the forces underpinning commodity prices, pushing them through a sustained period of increase.

What should be a boon for poor nations, especially the globe’s 48 least developed countries (LDCs) -- whose economies often depend heavily on commodity exports – is on balance a negative development because many of these countries are net importers of oil and staple foods, the study says. Since the food crisis of 2008, prices for basic nourishment have been both volatile and high, the report says – and poor families are acutely vulnerable, as they typically spend 50 per cent or more of their incomes on food.

One driving force of the change is the massive influx of financial capital that has flowed into commodity futures markets since 2003, the report says. Financial investors differ from producers or traders in that they are not concerned with the physical delivery of products, but rather in buying delivery contracts and later selling them for higher prices, thus repeating speculative profits. As these financial investors have pulled their money out of troubled bond and equity markets, the number of commodity futures contracts traded worldwide has exploded, climbing from approximately 500 million in 2003 to more than 2.5 billion in 2011. Similarly, the worldwide value of commodity derivatives, including both futures and options, rose from just over US$1 trillion in 2003, to more than $8 trillion in 2007, before subsiding to $3 trillion in 2009 and 2010.

UNCTAD contends that this “financialization” of commodities futures has fundamentally changed the conduct and outcomes of commodities markets in general, for example by changing a producer’s price expectations and reducing his ability to hedge against risk.

The report downplays the impact on climbing commodities prices of growing Chinese demand. […] UNCTAD finds that Chinese demand has indeed dominated the markets for metals such as copper, nickel, and in particular iron ore, for which it accounted for 63 per cent of world imports. But China’s share of world imports of oil (7 per cent) and food commodities (all less than 2 per cent), although significant, is not so high as to drive price movements. UNCTAD identifies biofuels as a third new twist in the current commodities boom. In the 2003-2004 harvest year, world maize farmers devoted 5 per cent of their crops to producing ethanol, which is marketed as an alternative to fossil fuels and mixed with gasoline. By the 2010-2011 harvest year, the proportion of world maize production converted to ethanol had tripled to 15%. Generous subsidy programmes in the USA, Europe, and Brazil played a role in convincing farmers to use maize and sugar crops to produce biofuels instead of food. UNCTAD estimates that competition from biofuels contributed an estimated 15 to 20 per cent to cereal export prices. More fundamentally, biofuels link cereal markets with energy markets, weakening the influence of demand and supply signals on cereal prices.

Recommendations of UCDR 2012:

  • Steps should be taken to invest in national and regional food reserves to help food-insecure countries.
  • The recent shift to “finance-driven globalization,” as it applies to commodities, should be reconsidered, especially in comparison to the standard development model in which profits from commodities exports are used to increase domestic investment that can help diversify and expand the capacities of developing-country economies.
  • That fiscal and taxation policies be adjusted so that they help developing countries reap stable, long-term economic benefits from commodities exports.
  • That measures be taken nationally and internationally to improve the situations of small farmers and other small commodity producers in poor countries.

Elite capture of fuel subsidies

There is a long running debate over elite capture of blanket, across-the-board subsidies in developing countries. Subsidies are primarily meant for people who cannot afford basic necessities or are targeted to those who are below the poverty line. However, there is a danger of elite capture as is seen in fuel subsidies, relief program for rural households, payment for employment schemes, etc. Almost all developing countries subsidize fuel costs to stabilize prices and to help poor households cope with fuel price volatility. However, fuel subsidy is not targeted and widespread leakage is common. Even though the targeted group get subsidized fuel in the market, a large proportion of it is consumed by the elite (because their consumption demand is higher—so will be subsidy). It puts strain on fiscal deficit and trade deficit.

A recent study in seven African countries shows that on average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.

Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich.  Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.


More here.

The high share of income spent by poor households on fuel relative to well off households means that if fuel subsidies are taken off, then it would hurt poor the most. The poor’s demand for fuel is more price inelastic than rich’s demand for fuel.

Results of simulating the short-term (assuming no substitution away from fuel) direct impact of a 20 percent increase in energy prices (using SHIP data) show that both rich and poor households would see a substantial negative impact on consumption: a decline of nearly 1 percent for the top quintile and of 0.5 percent for the bottom quintile. Other studies estimate that the total impact—direct and indirect—of higher fuel prices as a percent of consumption is about the same across income quintiles

For nine African countries the average short term direct and indirect welfare impact of a $0.25 per liter increase in fuel price is estimated to be 2 percent and 3.8 percent of per capita consumption respectively. Unlike the rich, the poor have very limited capacity to offset the effects of the price shock on overall consumption by borrowing or drawing on savings.

The figure below shows size of fuel price subsidy (% of GDP) in select SSA countries.

What is the solution to this? Well, there is no easy fix:

Removing subsidies and raising prices needs to be well managed. For one thing, social assistance programs need to be strengthened so as to help poor and vulnerable households weather the price shock. Another is to increase public understanding and support for subsidy reform by having a transparent and evidence-based discussion and scrutiny of subsidies: the full cost of the subsidy, the distribution of the subsidy and who is benefiting from the subsidy, and the implications for public spending on priority areas.