Benefiting from Rising World Prices

Jose Graziano Da Silva (The EastAfrican)—The deterioration of terms of trade is one of the historic factors behind underdevelopment, which should be understood not as a stage of development but rather a specific and distorted form in which peripheral economies are inserted into the world capitalist system.

For the majority of these economies, colonial relations built around the export of raw materials were the primary cause of this underdevelopment.

Now, in the 21st century, some of these countries have slightly greater control over their economies thanks to the expansion of the evolving industrial base. But these few exceptions only prove the rule - internal patterns of wealth distribution dominate and this expansion is limited for the most part to nuclei of mineral or agricultural exports.

Thus income is concentrated in productive systems that remain subject to the ups and downs of global trade in raw materials.

For instance, the economic trajectory of Latin America and the Caribbean is marked by cycles that are both ephemeral and intense - silver, gold, sugar, and coffee, to cite a few examples from the past, and today soy, iron ore, and copper. Neither peripheral area has been able to escape this cyclical trap, which demonstrates the persistence of patterns of trade that transfer control over a country’s development abroad.

The recurrent nature of the losses caused by this trade model was first analysed in the 1950s at the dawn of the Economic Commission for Latin America by Raul Prebisch of Argentina and later studied by the Brazilian Celso Furtado, who explained in detail the structural limitations generated by this model, limitations which have perpetuated economic and political subordination throughout the history of the region.

In the past five years, the explosion of raw material prices began to affect one of the factors that cause underdevelopment, but it was insufficient to break the logic of the pattern identified by Furtado.

Since 2003, according to the Commodity Research Bureau, the average price of 24 agricultural raw materials on world markets has increased by 50 per cent. However, widening the time frame to the period from 1974-2004, The Economist magazine found an overall decline of 75 per cent in the price of these products. In other words, only a part of this decline has been reversed since 2003.

It is also important to evaluate on a yearly basis the factors behind this recent price increase in order to differentiate structural elements from those related to speculation.

Between 2002 and 2004, there was a rise in the consumption of high-protein foods, primarily meat and milk products, by the poor in developing countries, including China, India, and Brazil. At almost exactly the same time, the United States dramatically increased its consumption of ethanol, which drove up the demand for wheat.

This period of growth in demand was followed by a phase in which there was a scarcity of supply.

Between 2004 and 2006, world cereal production dropped significantly as a result of climatic factors, whether droughts in China and Australia or hurricanes in Central America and the Caribbean. This decreased the world cereal reserves at a time when consumption was on the rise.

Then in 2007, speculation emerged as the factor responsible for the sustained increase in prices - in a climate of economic uncertainty, many investors sought shelter in commodity funds, agricultural and non-agricultural.

There are thus two distinct elements driving the current price increases: One is financial; the other is the hitherto unheard of shift in demand caused by the expansion of consumption in poor countries. The former is transitory, while the latter could result in a structural change of the flux and intensity of the trade in foods and raw materials.

Though these dynamics are still underway, certain lessons can already be drawn. The first regards the risks implicit in dependence on exports of raw materials, as Prebisch and Furtado have warned for decades.

The second is the necessity of having a counterweight to economic policy to broaden the range of producers that benefit from cyclical increases in the demand for food. The strengthening of small agricultural producers and farmer co-operatives, for example, would widen the distribution of wealth in a way that would increase the chances of sustainable growth.

A propos, it is worth remembering that hundreds of millions of poor in the countries of the South live in rural areas. For them, the rise in prices is an opportunity to escape poverty, as long as they are guaranteed a market for their goods, in addition to traditional credit and technical assistance policies.

This can be accomplised, for example, through government purchasing of their production to form reserves and provide meals in schools.

The current crisis is a clear refutation of the neo-Malthusian thesis that agro-energy is primarily responsible for increases in commodity prices, which minimised the considerable speculative component, recognised even by the US government, which has proposed joint action by the Commodity Futures Trading Commission (which oversees the futures markets for these products) and the Security Exchange Commission (which regulates financial markets). In contrast, agro-energy emerges from the current financial crisis as a safe haven of real consistency and strategic continuity.

Even if global demand for commodities declines in the short term, the challenge of remaking the energy network for the 21st century has just begun.

Agro-energy can help sustain the expansion of poor countries and usher in a new dynamic of trade independence by industrialising biofuel crop farming and creating bridges between family agriculture and a peak sector of the global economy that is here to stay.

Jose Graziano da Silva is the regional representative for Latin America and the Caribbean at the UN Food and Agricultural Organisation

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