BACKGROUND PAPER

Commodity Initiatives of

Less Developed Countries:

U.S. Responses and Costs

May 1977

Congress of the United States

Congressional Budget Office

Washington, D.C.
COMMODITY INITIATIVES OF LESS DEVELOPED COUNTRIES:

U.S. RESPONSES AND COSTS

The Congress of the United States

Congressional Budget Office

Tor sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402
PREFACE

For a number of years, many less developed countries that

rely on exports of primary commodities have pressed for arrangements to stabilize their export earnings. Within the next six

months, the U.S. government will have to take a position on one

such proposal, the UNCTAD Integrated Program for Commodities. If

the United States participates in this agreement, authorizing

legislation and appropriations would probably be required.

This paper identifies potential beneficiaries of the integrated program and of alternative measures for stabilizing export

earnings. Such information should be useful to the Congress in

evaluating how costs and benefits of the integrated program

compare with other programs to assist LDCs.

This paper was prepared by Peggy L. Weeks of the National

Security and International Affairs Division of the Congressional

Budget Office (CBO) under the direction of Lawrence G. Franko

and John E. Koehler. The author wishes to acknowledge the

substantial assistance provided by Ramon Espinosa, James M.

Verdier, David R. Martin and Carl R. Neu of CBO, and CBO interns

Margaret Martin and Bruce Johnson. The manuscript was edited by

Johanna Zacharias and typed for publication by Patricia J. Minton.

Alice M. Rivlin

Director

May 1977

iii

CONTENTS

Preface , iii

Summary ix

Chapter I. Background and Objectives 1

Chapter II. Policy Options ... 5

International Commodity Agreements .... 6

Compensatory Finance 23

Foreign Aid . 28

Chapter III. Comparison of the Alternatives' Effects ... 31

Impacts on U.S. Producers and Consumers . . 31

Control of Benefit Distribution 32

Distribution and The New Directions

Objective . . 32

Effects on Political Relationships .... 33

The Budgetary Cost to the United States . . 35

Appendix A. Commodity-Exporting LDCs by Income Group ... 39

Appendix B. About The Data 41

TABLES

1. Market Price Fluctuations of LDC Commodities 7

2. Importance of UNCTAD Products to the United States ..... 14

3. Indicators of Less Developed Countries' Dependency for

Export Earnings on the Eighteen Commodities in the

UNCTAD List 16

4. Indicators of Less Developed Countries' Dependency for

Export Earnings on the Ten Core Commodities in the

UNCTAD List 17

5. Exports by Developed Countries of Commodities in the

UNCTAD Integrated Program 19

6. Amount of IMF Compensatory Finance Available to Less

Developed and Developed Countries 25

7. Commodity-Producing LDCs for Which the IMF Compensatory

Finance Scheme is Potentially Inadequate 27

8. Distribution of U.S. Foreign Economic Assistance

Among Groups of LDCs 29

vii

SUMMARY

Before November 1977, officials in the Executive Branch

must decide whether the United States will participate in the

United Nations Conference on Trade and Development (UNCTAD)

Integrated Program for Commodities. This program is designed to

stabilize export earnings of less developed countries (LDCs) by

establishing a series of commodity agreements and a common fund to

finance buffer stocks and other appropriate measures to reduce the

price fluctuations of 18 primary commodities.

Congressional interest in the integrated program is based

on several factors:

o The program could be negotiated as a treaty, which would

require Senate ratification.

o Authorizing legislation would be required that might

span the jurisdiction of several authorizing committees.

o Budget authority and appropriations might eventually

be required because the potential cost of U.S. participation in the UNCTAD program could range from $200 million

to $800 million over several years.

Regardless of U.S. participation, the integrated program could

have an impact on the price of commodities that the United. States

imports and exports.,

Alternative methods for compensating for export earnings

shortfalls include:

o Establishing international commodity agreements similar

to those under the integrated program but financed

separately and negotiated on a case-by-case basis.

o Expanding use of the International Monetary Fund (IMF)

facility for compensatory finance, a mechanism for

providing financing for declines in export earnings.

o Extending direct foreign assistance payments to governments of LDCs experiencing export earnings difficulties.

ix

in-382 O - 77 - 2
The analysis here focuses on the distribution of benefits,

both among and within countries, that are likely to result from

these options. Export earnings from products now under study

for inclusion in the integrated program are more important, as a

percentage both of total exports and of the gross national product

(GNP), to the economies of middle-income exporters than to the

economies of low- or high-income LDCs. Even though these measures

indicate less importance of UNCTAD products to the economies

of poorest countries, nearly all of the world's poorest countries

are dependent on UNCTAD products for a significant portion of

export earnings.

The IMF compensatory finance facility, as currently constituted, lends to countries experiencing shortfalls in export

earnings. The amount a member may borrow is based on that country's quota in the IMF; country quotas are based on a nation's

importance in the world economy. Thus, those countries ranked

poorest (on a per capita basis) are able to borrow the least;

the rich can borrow the most. Furthermore, the current IMF

facility has been inadequate to finance recent shortfalls for some

LDC applicants for assistance.

If foreign assistance payments were applied to offset shortfalls in export earnings, the distribution of benefits would

depend on which countries are experiencing the shortfalls.

Financing through foreign assistance a 10 percent shortfall in

export earnings for UNCTAD products would benefit the middleincome LDCs most in terms of total dollars transferred or dollars

transferred per capita.

These alternatives can be evaluated in terms of:

o Their likely impact on U.S. consumers and producers.

o What countries would be likely to control the distribution of benefits.

o How consistent they would be with the aims of the U.S.'

"New Directions" emphasis on assisting the poorest

people.

o What would be the likely effects on the relationships

between the United States and LDCs.

o What might be the budgetary cost to the United States.

x
Of all the various choices, the integrated program could

have the greatest impact on U.S. producers and consumers because

it is the only alternative with the potential to affect the prices

of a large number of U.S. imported commodities. The impact of the

integrated program on the magnitude and direction of price movements would depend on the terms of agreement and the normal price

and supply fluctuations for each commodity. The greatest degree

of control over the distribution of benefits could be exercised

by the United States in defining the terms and the recipients of

foreign assistance; once the terms of commodity agreements or

compensatory finance were negotiated, the benefits would be

distributed automatically depending on what is happening to

prices and to export earnings. Compared to other stabilization

options, the compensatory finance facility of the IMF could give

the most (in the aggregate) to the poorest countries. But the aid

would be loans that would have to be repaid with interest.

For the poorest people to benefit would depend largely on distribution within countries, which is determined largely by the

actions of recipient governments, or in the case of certain

commodities, on multinational corporations or local entrepreneurs.

Decisions regarding the integrated program and compensatory

finance could be the most politically sensitive, because they form

a package that the LDCs themselves have proposed and to which they

give high priority.

The budgetary cost to the United States of participating

in the integrated program could be a minimum of $200 million

and a maximum of $800 million over a period of several years.

The cost of commodity agreements negotiated on a case-by-case

basis would depend on which commodities were included. The type

of agreement chosen to bring about price stabilization would also

be an influential factor. Expanding compensatory finance facilities of the IMF could take place through overall quota increases,

which require Congressional authorization but no appropriations.

For the United States to finance a 10 percent shortfall in export

earnings for UNCTAD products through foreign assistance payments

could cost some $370 million for low-income LDCs, $660 million

for the middle-income group, and $670 million for the high-income

group. Such costs would be recurring. In contrast, the costs of

other proposals represent one-time investments.

xi

CHAPTER I. BACKGROUND AND OBJECTIVES

The governments of less developed countries (LDCs) are

dissatisfied with the pace of their nations' economic development

during the last few years. They cite as causes such factors as

fluctuating export; earnings, trade barriers, debt-servicing

problems, and insufficient levels of foreign assistance.

While such problems are not new, the climate surrounding the

LDC demands has taken on a new character. Paradoxically, the success in 1973 of a group of LDCs—the Organization of Petroleum Exporting Countries (OPEC)—in withholding supplies of oil to obtain both political benefits and increased earnings encouraged

many LDCs to join forces and work toward similar ends. At the

same time, the economic conditions of many LDCs were severely

worsened by the effects of the oil price increases. The result

was a more uniform set of demands consisting of measures designed

to transfer resources from rich nations to poor, to permit more

rapid growth of LDCs, and to bring about a New International

Economic Order.

Between 1973 and 1975, U.S. policymakers did not indicate

that they would be willing to accommodate LDC demands. Since 1975,

however, both LDCs and the United States have shown more inclination to compromise. The Ford Administration proposed various

measures to deal with LDC problems, including initiatives for a

few specific international commodity agreements, increased availability of compensatory finance, and an international resources

bank for encouraging investment in mineral exploration in LDCs. _!_/

_!_/ The International Resources Bank (IRB) was proposed by Secretary of State Kissinger at the UNCTAD IV conference.

It would have set up a mechanism for guaranteeing private

foreign investment in mineral exploration in LDCs. The fund

for financing this arrangement was estimated at $1 billion, of

which $200 million would be the U.S. contribution. The

resolution to create an IRB was defeated at UNCTAD, but

the plan has been discussed in other forums such as the

Council on International Economic Cooperation (CIEC) in Paris

and at meetings of the Organization of American States (OAS).

There is no indication at present that an IRB will be established in the near future, or that the new administration will

continue to pursue this as a separate option.

1
These measures have not always been the measures sought by the

LDCs themselves.

A principal forum for discussing issues raised by the LDCs

has been the meeting of the United Nations Conference on Trade

and Development, UNCTAD IV, held in Nairobi, Kenya, in May 1976.

Among the major issues presented at Nairobi by the so-called

"Group of 77" (the LDC caucus in the United Nations 2/) were

requests for international commodity agreements, improving the

compensatory finance facility of the International Monetary Fund

(IMF), improving market access for LDC exports of manufactures and

semi-manufactures (i.e., goods which have been partially processed, but cannot yet be sold as an end product) , alleviating the

LDC debt burden, and negotiating a code of conduct for the transfer of technology. _3/

In May 1976, officials of the Ford Administration agreed

that the United States should participate in preliminary sessions

to prepare the foundations for formal negotiation of the UNCTAD

Integrated Program for Commodities.

The first negotiating conference on the integrated program,

held in March 1977, ended in a stalemate, and plans were made

to resume in November 1977. At the March session, the U.S.

delegation stated that they could not support a common fund until

the details of its operations were clarified, kj

The objective of the program is to stabilize export earnings

for commodity producers, especially LDCs, and in particular

those that depend on a few primary commodities for their total

export earnings and for large amounts of government revenue. The

program calls for the establishment of a series of commodity

agreements and a common fund to finance buffer stocks (i.e.,

commodity stockpiles used as a cushion against price fluctuations)

and other appropriate measures for controlling extreme price

fluctuations of 18 primary commodities.

2j In fact, the Group of 77 represents more than 100 of the

world's poorest nations.

3/ U.N. Document, TD/195, "Manila Declaration," Nairobi, May 5,

1976.

kj Reginald Dale, "Commodities Fund Talks in Geneva Deadlocked,"

Financial Times, April 4, 1977.
U.S. interest in the Integrated Program for Commodities is

based on three factors: that the program, if enacted, might have

an impact on U.S. producers and consumers; that the U.S. response

to this LDC initiative might affect the political relationships

between the United States and LDCs; and that U.S. participation in

the program could result in a budgetary cost ranging from $200 to

$800 million in appropriations over six years.

Before investing in such a program, the Congress must

examine its implications, not only for the budget, but also

for the potential recipients of benefits—the commodity producers

and consumers. It is also useful to compare this progam with other

measures that could achieve substantially the same results, such

as commodity agreements negotiated on a case-by-case basis and

compensatory financing. Another topic that should be assessed is

the appropriateness of U.S. direct financial assistance as a tool

for compensating for shortfalls in export earnings.

Some LDC governments contend that extreme fluctuations

in export earnings are among the most serious obstacles to their

economic development. Stable export earnings are considered

necessary to promote investment in LDCs and prevent disruption of

development plans.

The economic evidence of the effects of excessive price

fluctuations on economic growth is mixed. For example, in 1966,

economist Alasdair MacBean concluded that, in general, there

is little evidence to indicate that LDC economies have been

damaged by short-term export instability. _5_/ Others, however,

have been critical of this conclusion. _6_/ The U.S. dilemma in

responding to LDC initiatives for stabilizing export earnings stems from a desire to promote some of the economic development objectives of LDCs and at the same time to maintain special

political relationships with particular LDCs, to ensure against

excessively high prices, and to protect U.S. producers and consumers .

_5_/ Alasdair MacBean, Export Instability and Economic Development

(London, George Allen and Unwin, Ltd., 1966).

jj./ For example, see Constantine Glezakos, "Export Instability and

Economic Growth: A Statistical Verification," Economic

Development and Cultural Change, July 1973.

CHAPTER II. POLICY OPTIONS

If the U.S. government accepts stabilization of LDC export

earnings as a valid objective, there are a number of instruments

that could be employed, either singly or in combination, to

achieve this objective. These include:

o International commodity agreements—either the UNCTAD

Integrated Program for Commodities or commodity agreements

negotiated on a case-by-case basis; and

o Compensatory finance; and

o Variable foreign assistance—that is, a system of direct

subsidies to countries that experience export earnings

shortfalls.

Each option can be analyzed according to the likely distribution

of benefits both among and within countries.

Besides distribution, a number of other criteria exist by

which these policy options can be evaluated. These include:

o What is likely to be the impact, if any, on U.S. producers

and consumers?

o Who controls the distribution of benefits?

o Is the distribution of benefits consistent with the

U.S. foreign assistance program's "New Directions" objective of helping the poorest people? In passing the

Foreign Assistance Act of 1973, the U.S. Congress stated

that priority should be given to the use of foreign

assistance funds to help the poorest people. Although

technically, this does not require that other arrangements

with LDCs such as international commodity agreements

follow these guidelines, many observers are interested in

the potential trade-offs between foreign assistance and

other forms of aid to LDCs.

90-382 O - 77 - 3
o What are the likely effects on political relationships between the United States and LDCs?

o What is the budgetary cost to the United States?

INTERNATIONAL COMMODITY AGREEMENTS

For many LDCs, the problem of fluctuating export earnings

is caused by heavy dependency on earnings from one or a few

primary products for both total export earnings and for government

revenues. Annual price fluctuations for the 18 commodities

included in the UNCTAD program are often 10 percent or more.

Prices have sometimes doubled or been halved in the span of a year

(see Table 1).

In most cases, total export earnings rise with an increase in

commodity prices and decline with a fall in commodity prices. _!_/

This is because price changes for a given commodity are not

accompanied by equivalent demands that would offset the effects

of the change. For example, when prices for copper increased

from over $1,000 per metric ton in 1972 to $1,800 per metric

ton in 1973, Chile's export earnings increased from $860 million

to $1.2 billion. When the price of cocoa declined from approximately 34 cents per pound in 1970 to 27 cents per pound in 1971,

total export earnings for Ghana fell from $430 million to $350

million. 2j

International commodity agreements are one often-proposed

solution to the problem of unstable export earnings. Commodity

agreements are accords among producers, or among producers and

consumers, that attempt to stabilize the price of a specific

commodity. As a result, they assist in stabilizing overall

_!_/ See Sara Gordon and others, "Causes of Export Instability

in Developing Countries," U.S. Department of the Treasury,

Discussion Paper Series, June 1975.

2j Commodity Trade and Price Trends, International Bank for

Reconstruction and Development, August 1975; and Yearbook

of International Trade Statistics, Volume 1, United Nations,

1974. More detailed statistics for many LDCs on export

earnings relative to prices can be found in International

Financial Statistics, published by the International Monetary Fund.
TABLE 1. MARKET PRICE FLUCTUATIONS OF LDC COMMODITIES: PERCENT

DEVIATIONS FROM TREND, 1953-1973 AND CHANGES IN AVERAGE

PRICES, 1972-1975

1953-1973 a/

Average

Deviations

Commodities From Trend

Bananas

Bauxite

Cocoa

Coffee

Copper

Cotton

Hard Fibres d/

Iron Ore

Jute

Manganese

Meat

Phosphates

Rubber

Sugar

Tea

Tin

Tropical Timber

Vegetable Oils

4.3

4.7

23.0

17.0

21.5

8 .,2

N/A c/

8.3

11.9

N/A c/

20.8

N/A c/

13 ,,2

33.4

6. ,2

7.9

N/A c/

N/A c/

Annual

1972-

1973 b/

Change

7

N/A c/

11.0

34

64

66

N/A c/

-9

-5

N/A c/

29

25

111

59

2

32

68

360

Annual

1973-

1974 b/

Change

14

N/A c/

51

7

37

63

N/A c/

20

12

N/A c/

15

340

8

245

33

67

27

81

Annual

1974-

1975 b/

Change

31

N/A c/

-14

15

-38

-15

N/A c/

58

12

N/A c/

9

18

-24

-33

1

-14

6

-60

SOURCES: From Statement of Bart S. Fisher before the Subcommittee

on Inter-American Economic Relationships of the Joint

Economic Committee on United States Policy Toward International Arrangements for Commodities, Appendix A, Joint

Economic Committee, August 12, 1976.

aj Column I is the average over the period of differences

between annual observations and calculated trend values

(irrespective of sign) expressed as percentages of the trend

value.

b/ Yearly averages data from Commodity Trade and Price Trends

(1976 edition), Section IV.

c/ Data not available.

d/ Hard fibres include sisal, henequen, abaca, and agave.
export earnings. (Commodity agreements that result from negotiations between producer and consumer countries, and that are

managed by representatives acceptable to both, should not be

confused with associations or cartels in which only one side is

represented.)

What impact, if any, would an international commodity agreement have on the long-term price trend for that commodity? For

example, if an international commmodity agreement keeps the price

of a given item within a range consistent with the free market

price for that commodity, the result would not constitute a

long-term resource transfer to the producing states. On the other

hand, an international commodity agreement that tends to raise the

long-run average price would lead to a permanent, long-term

transfer of resources to the producers. If the U.S. government

were facing a decision about whether or not to support an international commodity agreement that would raise the long-term price,

the alternatives for consideration would be mechanisms for direct

long-term resource transfers rather than stabilization measures.

In theory, there can be advantages both to producers and to

consumers in minimizing price instability. _3/ For the producers,

the benefits stem from a more favorable climate for investment and

development planning brought about by more predictable market

conditions. In addition, many governments depend upon export

taxes on primary commodities for a large portion—sometimes nearly

all—of government revenue, kj In such cases, stabilization would

mean more dependable government revenues for LDCs. Historically,

sudden shortfalls in revenues have often obliged LDC governments

to finance deficits by internal borrowing, by increasing external

debt, or by cutting public services and government expenditures.

In addition, consuming industries plan and invest with more

confidence when prices of commodities that they import are predictable. In both developed and less developed countries, fluctuations in the prices of raw materials have contributed to

increases in the prices of manufactured goods and to overall

3/ Richard N. Cooper and Robert Z. Lawrence, "The 1972-1975

Commodity Boom," Brookings Papers on Economic Activity, No.

3, 1975, pp. 707-709.

kj See, for example, Robert L. Curry, "Problems in Export

Based Public Revenue Collections in Zambia and Liberia,"

Journal of World Trade Law, Vol. 9, No. 5, 1975.
inflation. When commodity prices go down, concentrated industry

structures sometimes prevent prices paid by consumers from decreasing by an equivalent amount.

International commodity agreements may employ one or a

combination of four mechanisms for price stabilization:

o Internationally held buffer stock schemes, which would

establish funds to purchase a stock of a commodity so

that when prices are high, the buffer stock manager may

sell from the stock to depress price, and when prices are

low, the manager may make purchases for the stock to

prevent further reductions in price;

o Production control systems, which would attempt to control

price by controlling the amount of a commodity produced

by each exporter;

o Export controls or quotas, which would assign quantities

for export to each producer and which would be closely

related to production control schemes; 5J

o Multilateral contracts, which are arrangements by which

importers agree to buy and exporters agree to sell a

specified quantity of a commodity at a certain price. _&_/

The potential of an international commodity agreement as

an instrument for permanently raising prices, as opposed to

merely stabilizing them, depends largely on which of the four

mechanisms is included in the agreement. Theoretically, a buffer

stock could raise prices over the long term only if one assumes

there are infinite resources available for continual purchases

for the buffer stock of that commodity.

5_/ Both production and export controls have the same effect

on the international market, although they may have slightly

different effects within a producing country.

_6/ Harvey R. Sherman, "International Commodity Agreements:

A Brief Historical Review and Outlook," Congressional Research Service (May 30, 1973), pp. 2-3.
Producers or producers and consumers together could conceivably agree on a price range above the long-term trend. This

would require the buffer stock manager to act in the long run as a

net buyer, and repeated financing would have to be provided by the

producers or the producers and consumers. Production controls or

export quotas, by restricting total supply or whatever portion

enters international trade, would, however, make it possible

to keep the supply low and the price high. Such controls and

quotas would have to be agreed upon by the members of the agreement. Multilateral contracts might specify a higher-than-average

price, but since the quantity is specified, their impact on prices

paid by others would probably be minimal unless the quantity

under contract constituted a large portion of the market.

One advantage of a buffer stock over the other mechanisms

is that once the terms of the agreement have been negotiated,

the buffer stock manager can implement the agreement according to

the specified constraints. In general, he can make the necessary

adjustments to changes in supply and in distribution of production

without the whole agreement having to be renegotiated. The other

mechanisms necessitate renegotiations for adjustments, such as

redistributing quotas because of new producers. However, problems

may emerge in determining who will control the management of the

buffer stock.

International commodity agreements can be difficult to

implement. Negotiations often fail to produce an agreement

acceptable to all participants. Several factors could contribute

to this failure, including inability to agree on quota shares,

cost shares, voting power and procedures, upper and lower price

limits, and control of the buffer stock. Furthermore, once an

agreement has been reached, there are still factors that could

interfere with its implementation. Among these are new producers

entering the market, changes in the quantity of a commodity each

producer exports, and price increases sufficient to exhaust the

buffer stock.

UNCTAD Integrated Program for Commodities

One approach to commodity agreements now under consideration

is the UNCTAD Integrated Program for Commodities, which has been

under study by the Group of 77 for more than two years. This

proposal would establish a series of commodity agreements and a

common fund of $3 to $6 billion for financing buffer stocks or

other suitable arrangements for 18 commodities. The plan, clarified by the LDCs at the Manila Conference in February 1976,

10
was presented three months later in Nairobi by the Group of 77.

The resolution on commodities that was passed at this session

states among its objectives:

To achieve stable conditions in commodity trade,

including avoidance of excessive price fluctuations, at levels which would:

a) be remunerative and just to producers and

equitable to consumers;

b) take account of world inflation and changes

in the world economic and monetary situations;

c) promote equilibrium between supply and

demand within expanding world commodity

trade. l_l

At the Nairobi session, the LDCs and many industrial nations

reached an agreemsmt to take steps toward negotiating a common

fund and to study the particular needs of each commodity and of

the nations most seriously affected by the 1973-1974 oil price

rise. 8/

Response from developed countries to the integrated program

has been mixed. Canada, Norway, the Netherlands, and Sweden

have shown support; Germany and Japan have expressed reservations. _9_/

 Tne

 United States voted for the commodity resolution

but issued a statement of clarification, saying that it is committed to nothing more than to participating in the preparatory

discussions on individual commodities that began in the fall of

TJ U.N. Document TD/L 131, p. 3.

8/ Ibid., pp. 4-5,.

9/ Some developed, countries have proposed compromise programs

of their own. For example, France proposed a "Central Fund"

to be set up after four or five international commodity

agreements with individual funds have been negotiated.

This differs from the common fund approach, which seeks to

have the fund established as a first step. (See Reginald Dale,

"The Hard Bargaining Begins,," Financial Times, May 8, 1976.)

11
1976. 1Q/ Initial discussions were completed on copper, jute, and

hard fibres.

The Nairobi resolution specifies, but does not limit, the

coverage of the integrated commodity program to include the

following 18 commodities, the first ten of which are the "core"

commodities, or those of greatest export interest to LDCs:

cocoa rubber

coffee sugar

copper tea

cotton and tin

cotton yarns bananas

hard fibres bauxite

and products

jute and products

iron ore

manganese

meat

phosphates

tropical timber

vegetable oils, including

olive oil and oil seeds

UNCTAD argues that a common fund may be cheaper than having

individual financing for 18 separate agreements. Assuming that

the fluctuations for various commodities are not moving simultaneously in the same direction, a common fund could finance

purchases of one commodity with receipts from sales of others.

Furthermore, the integrated program may be able to obtain financing at better terms than would individual agreements, because

the larger organization could borrow larger sums of money at lower

interest rates.

A serious consideration in formulating the U.S. position

toward the integrated program is what potential the integrated

program has to be successful without U.S. participation. This

issue is important for the Executive Branch officials who must

decide what the U.S. position will be at the November 1977 negotiating session. It is equally significant for the Senate, which

must make a decision on ratification of any agreement that may

come out of that conference, and for the Congress as a whole,

which must resolve whether or not to pass authorizations and

appropriations for the program.

If there appears to be sufficient support for instituting

the program without U.S. participation, the United States may

wish to consider participating in order to have a vote in the

10/ U.S. Department of State, "U.S. Statement of Reservation

and/or Interpretation," May 1976, p. 2.

12
decisions of the organization. This vote could serve to protect

the interests of U.S. producers and of U.S. customers who would be

obliged to pay the international price produced by the agreement

for whatever amount of these products the United States imports.

The significance of these amounts is illustrated in Table 2, which

lists U.S. shares of world exports and the shares of U.S. consumption for each imported UNCTAD commodity.

The United States has more of an interest as an importer than

as an exporter in the 18 commodities. Of the ten core commodities, the United States is a major exporter only of cotton, but it

is the major importer of sugar, coffee, cocoa, jute, hard fibres,

rubber, and tin. In addition, the United States is a major

importer of tea and on a ismaller scale, of copper, ll/ Measured

in dollars, the total value in 1973 of U.S. coffee and cocoa

imports alone exceeded that of all U.S. cotton exports. 12/

Many details of the integrated program have yet to be

clarified. Among these are:

o How the program will be coordinated with existing commodity agreements;

o What the relationship will be with the existing International Monetary Fund facility for financing buffer

stocks;

o What the appropriate timing will be for accumulating the

buffer;

o How much the necessary capital for acquiring the buffer

will be;

o How the voting system in the agreement will be organized;

o Who will control the management of the buffer stocks;

and

o Which products will be included.

ll/ U.N. Document TD/B/C 1/196, October 6, 1975, pp. 11-14.

12/ Yearbook of International Trade Statistics, Vol. 1, United

Nations, 1974.

13

90-382 O - 77 - •
TABLE 2. IMPORTANCE OF UNCTAD PRODUCTS TO THE UNITED STATES:

ESTIMATED FOR 1976

Percent of World Percent of U.S.

Exports Accounted Domestic Confor by the United sumption Accounted

Commodities States For By Imports

Bananas

Hard Fibres

Jute

Tropical Timber

Vegetable Oil

Bauxite

Manganese

Phosphates

Cocoa

Coffee

Copper

Cotton

Iron Ore

Meat

Rubber

Sugar

Tea

Tin

3

a/

a/

a/

20 b/

a/

a/

12

a/

a/

a/

21

2 c/

1

a/

a/

a/

a/

100

100

100

100

a/

88

98

a/

100

100

20

!/

17

5

100

38

100

84

SOURCES: International Trade Commission, Commodity Data Summaries;

1976; Department of the Interior, Bureau of Mines, Survey

of Current Business, 1976; International Economic Report

of the President, March 1976, p. 96.

aj U.S. proportion insignificant,

b/ Average for 1970-1971.

c/ Average for 1970-1972.

If U.S. officials decide to seek a more modified version of the

integrated program than the one the Group of 77 now supports, the

November 1977 negotiating session will provide an opportunity for

the United States to seek compromises on these and other aspects

of the integrated program. A major point of controversy is

14
likely to be whether the common fund will be established as a

first step to be followed by the negotiation of individual agreements, or whether the agreements will be negotiated first, to be

followed by the establishment of the common fund. The Group of 77

favors the former position, arguing that lack of financing has

been an obstacle in the past to the creation of commodity agreements. The United States, being reluctant to become committed to

agreements the details of which have not yet been negotiated,

favors the latter position.

An analysis of who would benefit from the UNCTAD program is

based on the assumption that those countries that would benefit

most are those whose economies are most dependent on UNCTAD

products. How dependent particular economies are on UNCTAD

products can be measured to some extent by the portion of export

earnings accounted for by UNCTAD products, and by export earnings

for UNCTAD products calculated on a per capita basis or as a

percent of the gross national product (GNP).

In addition, it is possible to estimate roughly how much

particular countries or groups of countries would benefit from

stable prices in UNCTAD products. Given the history of price

fluctuations, those fluctuations resulting in a 10 percent

change in export earnings can be taken as typical. In this

analysis, 10 percent of earnings for UNCTAD products expressed in

dollars represents the portion of export earnings that fluctuates

and the portion of earnings that would not fluctuate if prices for

UNCTAD products were stable.

Table 3 gives various indicators of the degree to which

the 18 commodities included in the UNCTAD IV commodities resolution were important to groups of LDCs for export earnings and to

their economies as a whole. Only countries that are dependent on

earnings from one of the 18 commodities for more than 7.5 percent

of total export earnings are included in the calculations (7.5

percent is the cut-off point used under STABEX), a program organized between the European Economic Community (EEC) and 46 African,

Caribbean, and Pacific LDCs.

For 1970 and 1973, the economies of middle-income LDCs

are more dependent on UNCTAD products than are those of either

the poorest or high-income LDCs. This is true if dependency is

measured by commodity earnings as a percent of total export

earnings of the commodity producers within each income group; it

remains so if dependency is measured by export earnings for UNCTAD

products as a percent of GNP or by export earnings for UNCTAD

products per capita. The exception to this distribution pattern

15
TABLE 3. INDICATORS OF LESS DEVELOPED COUNTRIES' DEPENDENCY FOR EXPORT EARNINGS ON THE

EIGHTEEN COMMODITIES IN THE UNCTAD LIST: ESTIMATED FOR 1970 AND 1973

Less Developed

Countries by

Income Group

28 Low-Income

(Below $200 GNP

Per Capita) b/

Percent of

Export Earnings

Accounted for

1970 1973

43 35

Export Earnings

As a Percent of

GNP

1970 1973

3 3

Export Earnings

In Dollars

Per Capita

1970 1973

3.3 3.8

10 Percent of

Export Earnings

In Millions

of Dollars a/

1970 1973

278 374

24 Middle-Income

(Between $200-

$500 GNP Per

Capita) b/ 61 52 10 9 23.3 29.7 481 663

16 High-Income

(Over $500 GNP

Per Capita) b_/ 43 37 4 22.1 31.0 444 672

SOURCE: International Financial Statistics, June, 1976, International Monetary Fund and

Yearbook of International Trade Statistics, 1974, United Nations. (For details

on methodology, see technical footnotes following the appendix.)

a/ Total per group,

b/ Based on World Bank Atlas, 1975.

is that the per capita measure in 1973 is greatest for the highincome LDCs. However, the UNCTAD commmodities program could help

nearly all of the low-income LDCs. It would benefit roughly

one-half of the countries within the high-income group and twothirds of the middle income LDCs. The value in dollars of export

earnings for UNCTAD products is less for the poorest countries

than for either the middle-income or high-income LDCs. For

example, in 1970, a 10 percent rise (or drop) in commodity earnings for the UNCTAD commodities would have benefited (or harmed)

the poorest countries in the approximate amount of $278 million.

The middle-income nations would have eperienced a change of

$480 million, and the high-income LDCs, $444 million. How much

stabilization of prices for UNCTAD products would actually benefit

each income group depends on the magnitude of earnings fluctuations within each income group resulting from commodity price

fluctuations. (A list of countries assigned to each income

group is included in Appendix A.)

16
The distribution described above is the same when the ten

core commodities are examined. LDCs export the largest share of

world exports of core commodities, whereas the remaining eight

commodities are exported in many cases by developed countries. It

is useful, therefore, to examine the ten separately because they

are considered far more likely candidates for agreements under the

UNCTAD program than are the remaining eight commodities. Table 4

illustrates the dependence on the core commodities of the economies of various groups of LDCs.

In all income groups, both for the ten core products and

for the full eighteen, shares of UNCTAD commodities as a percent

of total exports declined from 1970 to 1973. This is probably

attributable to an increase in the non-commodity exports of

LDCs.

TABLE 4. INDICATORS OF LESS DEVELOPED COUNTRIES' DEPENDENCY FOR EXPORT EARNINGS ON THE

TEN CORE COMMODITIES IN THE UNCTAD LIST: ESTIMATED FOR 1970 AND 1973

Percent of

Export Earnings

Accounted for

Major Groups

of LDCS 1970 1973

28 Low-Income

(Below $200 GNP

Per Capita) b/ 37 28

10 Percent of

Export Earnings Export Earnings Export Earnings

As a Percent of in Dollars in Millions

GNP Per Capita of Dollars a/

1970 1973 1970 1973 1970 1973

3 3 2.90 3.00 227 287

24 Middle-Income

(Between $200-

$500 GNP Per

Capita) b/ 51 41 19.80 23.50 353 462

16 High-Income

(Over $500 GNP

Per Capita) b/ 39 34 4 17.90 25.70 308 482

SOURCE: International Financial Statistics, June, 1976, International Monetary Fund and

Yearbook of International Trade Statistics, 1974, United Nations.

a_l Total per group

b/ Based on World Bank Atlas, 1975.

17
Just how the benefits from stabilization of a particular

commodity will be distributed.across income groups is not always

entirely predictable. Income for a given item may be increasing

within one group and remaining stable or even declining within

another. For example, while the dollar value of copper exports in

1970 and 1973 remained relatively constant for LDCs with per

capita GNP above $500 and those between $200 and $500, the dollar

value to the group below $200 declined. The value of cotton

nearly doubled for those LDCs over $500 per capita GNP, and

increased to a lesser extent for those below $200; but it remained

stable for the middle-income group.

When LDCs are categorized by continent rather than by income

group, the economies of Latin America and Africa are revealed to

be more dependent on UNCTAD products than are those of Asia or

Oceania. Latin American trade in UNCTAD products is slightly more

than Africa's in terms of dollars. Export earnings for UNCTAD

products as a percent of total exports and as a percent of GNP

indicate that African LDCs' economies are most dependent on UNCTAD

products.

Developed countries that export UNCTAD products are far

less dependent on them for export earnings than are LDCs. Australia, Canada, New Zealand, Sweden, the Soviet Union, Ireland,

and the United States are examples of exporters in developed

countries that could benefit from the integrated program (see

Table 5)., Although the export earnings per capita from UNCTAD

products for these seven nations are less than the per capita

measures for high-income LDCs, they are much higher than those for

the poorest countries. A 10 percent rise (or drop) in commodity

earnings for all 18 commodities would benefit (or harm) these

seven developed countries in the amount of roughly $900 million.

A 10 percent rise (or drop) in earnings for the ten core commodities would benefit (or harm) these countries in the amount of

$300 million.

A relationship seems to exist between the developed countries

that would be the likely beneficiaries and the positions they

presented at UNCTAD IV. For example, Canada and Ireland were

among the strongest supporters of the common fund. 13/ Canada

is the leading exporter of the ten core commodities in the

developed world, and Ireland is one of the few developed countries

dependent on UNCTAD products for a significant portion of export

earnings.

13/ Reginald Dale, "Optimism About Accords with Developing

Countries," Financial Times, May 8, 1976.

18
TABLE 5. EXPORTS BY DEVELOPED COUNTRIES OF COMMODITIES IN THE

UNCTAD INTEGRATED PROGRAM

Developed

Countries

Australia (1973)

Canada (1973)

Ireland (1973)

New Zealand (1973)

Sweden (1974)

USSR (1972)

United States (1973)

Percent of

Export

Earnings

Accounted for

28

6

13

31

6

10

1

Export

Earnings

in Dollars

Per Capita

199.3

63.6

91.4

271.5

77.3

6.1

8.2

10 Percent

of Export

Earnings

in Millions

of Dollars

262

141

28

81

63

152

172

Developed Commodity

Products 17.6 898 a/

SOURCE: Yearbook of International Trade Statistics, 1974, United

Nations.

a/ Column does not add to total because of rounding.

Whether poor countries or poor people in producing countries

derive the full benefits of commodity stabilization depends in

part on who owns the mines, farms, and plantations. In countries

such as Malaysia, where small farmers own many of the production

sites for natural rubber, the benefits from a commodity agreement

in that material could go directly to poorer people in rural

areas. In cases where multinational firms own the mines or

plantations, such as is the case for natural rubber in Liberia and

bananas in several Central American countries, benefits might or

19
might not go to local citizens and laborers. For example, an

UNCTAD study concluded that of every retail dollar of sales in the

banana industry, $0.87 returns to foreign enterprise and only

$0.13 goes to local producers. 14/

In cases in which multinationals own mines and plantations,

the LDC governments themselves would benefit to the extent that

multinationals paid higher taxes or wages when materials prices

either increased or did not decrease. In countries where local

governments either own the sources of production or centralize

sales through a government marketing board, the local governments

would determine whether the benefits of commodity agreements would

in fact accrue to the poorest people in their countries.

In general, it appears that, in countries with less than

$200 per capita GNP, local private firms and government marketing

boards sell the coffee, tea, jute, cotton, and vegetable oil

exports. Multinational or local private firms and LDC state

companies are more prominent in exports of the middle and betteroff LDCs.

Viewed item by item, the structure of ownership is quite

heterogeneous. Multinationals have been most prominent in mining

and minerals; local firms have been most important in agricultural

commodities. Nevertheless, there has been a clear trend over the

past decade toward government ownership of production or involvement in marketing. 15/ Until recently, production of bauxite and

iron ore was almost exclusively in the hands of multinational

companies. However, LDC governments are increasingly obtaining

ownership participation in these; minerals. Control in copper

and tin has been shared among governments, multinationals, and

local private firms. In these industries, too, there has been a

trend toward increased government ownership. Phosphate exports

are almost exclusively controlled by state monopolies. Furthermore, in sectors where multinationals continue to be active, LDCs

have increased their tax take on multinational output. Governments, through state marketing boards, control most exports of

14/ U.N. Document TD/B/c.1/162, "Marketing and Distribution

System for Bananas," 1974.

JJL/ United Nations Economic and Social Council, Committee on

Natural Resources, Permanent Sovereignty Over Natural

Resources, Report of the Secretary General, New York,

January, 1975.

20
cocoa, cotton, hard fibres, arid jute—even though ownership of

farms and plantations is often in the hands of private farmers or

of cooperatives.

Commodity Agreements Negotiated on a Case-by-Case Basis

One approach to commodity agreements, which reflects the

policy stance of the Ford and Carter Administrations, is that

international commodity agreements should be negotiated on a

case-by-case basis. This differs from the UNCTAD approach, in

that negotiations,, management, and funding for each agreement are

all handled by separate commodity organizations. This approach is

justified on the grounds that the markets for each commodity have

different characteristics and implications for the United States.

Unlike most LDC commodity producers, the United States is

in an ambiguous position, being both a major producer and a

major consumer. Rationale for U.S. interest in commodity agreements for coffee, cocoa, and copper (three of a handful of commodities given priority consideration for negotiations by the Ford

Administration) stems from a different set of circumstances in

each case. For example, the United States has been a member of

several successive international coffee agreements, the most

recent of which was ratified by the Senate in 1976. The nation

produces no coffee but is the world's largest importer of coffee.

The coffee agreement appears to have served as a political means

for the United States to support the interests of coffee producers, especially those in Latin America. In the case of cocoa,

another product the United States does not produce, the U.S. firms

that are importers of cocoa were not opposed to an agreement.

Nevertheless, the United States refused to join an agreement

negotiated in the fall of 1975 because the specified price range

was considered too high.

The United States is the largest producer of copper in

the world, but imports more copper than it exports. Many U.S.

copper producers oppose a commodity agreement in copper largely

because they feel it could damage the domestic copper industry by

increasing access to foreign sources of copper. In spite of this

opposition, however, the Ford Administration supported the creation of a producer/consumer forum, a permanent group working

toward a price agreement in copper. The inclusion of consumers in

this forum was recommended by the International Council of Copper

Exporting Countries (called CIPEC), an association of copper

producers that has been frustrated in its unilateral attempts to

stabilize the copper market.

21
Another argument for the case-by-case approach to commodity

agreements is the wide variety in the views of U.S. industries

that import or export commodities. For example, U.S. cotton

exporters are opposed to an international commodity agreement

in cotton because they feel that, such an agreement could only

result in a decrease in the U.S. share of world cotton exports.

In principle, U.S. importers of rubber and cocoa do not oppose

international commodity agreements; but industry associations

have indicated that they might object to particular aspects of

commodity proposals. For example, U.S. cocoa importers recommended that the United States not join the current international

cocoa agreement because, to some extent, they opposed the provision for continual use of export quotas. U.S. wheat growers are

promoting the international agreements being negotiated by the

International Wheat Council in London. For other industries,

such as sugar, however, there is no agreement among various

segments of the industry as to the desirability of international

commodity agreements and their potential impact on commodity

markets.

The distribution of benefits from commodity agrements

negotiated on a case-by-case basis depends on which commodities

are to be included. The Ford Administration suggested that five

of the ten core commodities be given priority consideration on a

case-by-case basis: copper, tin, cocoa, sugar, and coffee. 16/

These five commmodities are the same five cited on the UNCTAD

16/ See "Global Consensus and Economic Development," Congressional Record, September 9, 1975, pp. H8528-9. At the same

time, the Ford Administration assigned priority to food

grains (wheat and rice) , which are not included on the UNCTAD

list. These are covered under the proposal for an International Food Reserve being negotiated by the International

Wheat Council in London. The proposal emphasizes ensuring

adequate food supplies to prevent starvation in time of world

shortage more than it does correcting commodity price fluctuations. The poorest countries account for 11 percent of

world rice exports and less than one percent of world wheat

exports. In Secretary of State Kissinger's address at UNCTAD

IV, bauxite and iron ore were named for priority consideration. (See Department of State, "Address by the Honorable

Henry A. Kissinger before the Fourth Ministerial Meeting of

the United Nations Conference on Trade and Development," May

6, 1976, p. 8.) Exports of these commodities are concentrated largely in high-income LDCs and developed countries.

22
list of core commodities for which the smallest shares of world

exports are accounted for by the poorest countries. The poorest

countries account for about 13 percent of world copper exports, 15

percent of coffee exports, 14 percent of tin exports, 4 percent of

cocoa exports, and 1 percent of sugar exports. This contrasts

with the importance to the poorest countries of two other commodities on the UNCTAD list, jute and tea. The poorest account

for 85 percent and 86 percent respectively of all world exports of

these two commodities. In other words, if U.S. officials choose

to apply the foreign assistance objective of helping the poorest

people to commodity agreement proposals, agreements in UNCTAD

products would come closer to that objective than would agreements

in the commodities to which the Ford Administration gave priority.

COMPENSATORY FINANCE

Increased availability of compensatory finance offers another

method of dealing with the problems caused by fluctuations in

export earnings. Compensatory finance is a means of providing

assistance in the form of loans to make up for shortfalls in a

country's export earnings. It can be linked either to earnings

from specific commodities or to overall export earnings. Currently, compensatory finance facilities are available within the

International Monetary Fund and within the STABEX program.

Unlike commodity agreements, which are designed to assist

major commodity exporters, the compensatory finance fund of the

IMF is available to any member country that exhibits a deviation

below a five-year trend in its export earnings. In the past,

availability of the fund to members has been constrained by the

quota restrictions on how much can be drawn by each member in a

certain time period. Until December 1975, members could draw for

this purpose 25 percent of their quotas in the IMF in any 12-month

period and could have no more than half of their quotas outstanding at any one time. Difficulties have arisen from the fact

that, in many cases, shortfalls have been in excess of the 50

percent of quota limit. This constraint led to a decision in late

1975 to expand the compensatory finance facility. The liberalization of the fund amounts to a redefinition of the terms of

access, rather than acquisition of new capital for the Fund. The

action did not require any Congressional authorization or appropriation. Countries are now allowed to draw 50 percent of their

IMF quotas over any 12-month period, but they may never exceed 75

23
percent of their quotas. 17/ For example, after borrowing 50

percent in 12 months, assuming no previous borrowing outstanding,

in month 13 an additional 25 percent may be borrowed. No more

funds are then available until the member has repaid some portion

of its indebtedness. Then another loan can be negotiated to take

the member back to 75 percent of quota outstanding. Drawings

for conpensatory finance are in addition to what members may draw

from other facilities within the IMF.

The IMF considers that its current assets are insufficient

to allow an increase in the amounts available for compensatory

finance without an increase in the quotas in the IMF. Authorization for such an additional quota increase of some 30 percent,

however, was passed by the Congress in 1976 and signed by President Ford. It is expected to take effect in mid-1977 and will

increase proportionally the amounts member countries can borrow

from the compensatory finance facility.

The country-by-country distribution of access to the compensatory finance facility of the IMF reflects the fact that

eligibility for loans is based on the size of a member's contribution to the IMF. Thus, the poorest countries may borrow

the least and rich countries the most. Access to the IMF compensatory finance facility (when measured on a per capita basis)

is now nearly the same for the countries that are commodity

producers within each income group as it is for all IMF members

within each income group (see Table 6). The per capita distribution for all LDC members of the IMF (including non-producers

of commodities) provides the poorest with the least and the

high-income group with the most. The poorest LDCs are eligible

for the least on a per capita basis, but the middle-income group

could receive slightly more than the high-income group.

When measured in dollars for less developed IMF member

countries as a whole, the largest sum is available to the highincome group; next come the poorest, and last, the middle group.

The largest amount of compensatory finance is available to the

low-income group, followed by the high-income group, and finally,

by the middle-income group.

17/ International Monetary Fund, Memorandum, "Compensatory

Financing of Export Earnings," December 24, 1975, p. 1.

24
TABLE 6. AMOUNT OF IMF COMPENSATORY FINANCE AVAILABLE TO LESS DEVELOPED AND

DEVELOPED COUNTRIES: ESTIMATED FOR 1976

Countries by Income Group

and Development Status

50 Percent of IMF

Quota in Millions

of U.S. Dollars

50 Percent of IMF

Quota Per Capita

in Millions of

U.S. Dollars

Commodity Producers

28 Low-Income Countries

(Below $200 GNP Per Capita)

24 Middle-Income Countries a/

($200-$500 GNP Per Capita)

16 High- Income Countries V ,

($500-$1000 GNP Per Capita)

6 Developed Countries d/

1,245

797

1,045

5,216

1.2

3.7

3.0

20.1

All IMF Members

Low-Income Countries

(Below $200 Per Capita GNP)

Middle- Income Countries

($200-$500 Per Capita GNP)

High-Income Countries

($500-$1000 Per Capita GNP) cj

Developed Countries

1,439

1,296

2,015

12,171

1.3

3.9

5.1

16.8

SOURCE: International Financial Statistics, June 1976.

_a/ Data for St. Lucia not available. ,

_b/ Data for Surinam not available.

c_/ Some countries with more than $1,000 per capita GNP are

included, since they are classified as LDCs by the World

Bank.

d/ The Soviet Union is not a member of the IMF.

25
By any measure, the amounts available to either developed IMF

members as a whole or to the commodity-producing developed

countries far exceed the amounts available to LDCs. Since the

1975 liberalization of the compensatory finance facility, however,

the LDC:3 have actually drawn considerably more from the facility

than have developed countries.

All countries can benefit from the IMF scheme, not just those

who are producers of large quantities of certain primary products.

Also, unlike commodity agreements, compensatory finance is useful

in assisting producers who are; experiencing shortages in the

amount of a product available for export, and especially for those

producers who are unlikely to have a significant impact on

the world market. The compensation provided by the IMF compensatory finance scheme, however, is in the form of short-term loans,

and the borrowing country must pay interest of 4.5 to 6 percent,

the exact amount depending on the period of time for which the

loan is extended. This can range from one year to five.

Table 7 illustrates for selected producers of the UNCTAD

18 commodities how much of a decrease in commodity earnings could

be financed by what is available from the IMF compensatory finance

facility. For about half the commodity-producing LDCs, the IMF

could finance in a one-year period decreases of less than 20

percent in export earnings for UNCTAD products.

An example of a compensatory finance facility that links

the availability of loans to deviation from the trends in export

earnings for specified products, rather than to drops in total

export earnings, is STABEX. The STABEX program is a product of

the Lome Convention of 1975, an agreement between the EEC and 46

African, Caribbean, and Pacific (ACP) countries. The EEC has

designated a sum of $450 million for use in financing export

earning shortfalls for the 46 ACP countries in 12 primary product

groups:

groundnuts rawhides, skins,

cocoa and leather

coffee wood

cotton bananas

coconut tea

palm and raw sisal

palm nut products iron ore

Many of these products are also included on the UNCTAD list.

A country is eligible if export earnings of one of the 12 products

26
TABLE 7. COMMODITY-PRODUCING LDCs FOR WHICH THE IMF COMPENSATORY FINANCE SCHEME

IS POTENTIALLY INADEQUATE

IMF Member Countries for

Which 50% of IMF Quota Estimated Amount

Would Finance Decreases Estimated Percent Decrease Available in Millions

in UNCTAD Commodity in UNCTAD Commodity Earnings of U.S. Dollars

Earnings of Less Than 20% That the IMF Would Finance (50% of IMF Quota)

Low-Income LDCs

Sudan

Uganda

Zaire

Togo

Mauritania

Tanzania

Indonesia

Kenya

Ethiopia

Gambia

Middle-Income LDCs

Ghana

Ivory Coast

Liberia

Zambia

Philippines

Guyana

Guatemala

Honduras

Cameroon

Ecuador

El Salvador

Colombia

Bolivia

Paraguay

Mauritius

High-Income LDCs

Malaysia

Dominican Republic

Nicaragua

Gabon

Fiji

Peru

Costa Rica

Chile

SOURCE: Yearbook of International Trade

national Financial Statistics,

17

10

14

17

6

16

16

19

14

18

11

5

7

4

7

13

11

9

9

10

10

19

16

18

11

5

11

11

7

17

19

10

9

Statistics, 1974, United

June 1976. (Based on 1973

42

23

67

9

8

24

151

28

16

4

50

30

17

44

90

12

21

15

20

19

20

91

21

11

13

108

25

16

8

8

71

19

92

Nations; Intertrade statistics

and current availability of IMF.)

27
account for 7.5 percent or more of total export earnings. 18/

The distribution of benefits from this program is, as with commodity agreements, limited to primary-product producers, such as

Mauritania, Liberia, Jamaica, Tanzania, and Zambia.

FOREIGN AID

Many observers have speculated about whether international

commodity agreements could substitute for foreign assistance. In

its traditional form, foreign assistance can be an alternative to

commodity agreements that result in long-term resource transfers

due to increases in long-run average prices. However, foreign

assistance theoretically can also be adapted to alleviate the

short-term difficulties discussed here. In other words, the

United States could directly subsidize countries experiencing

shortfalls in export earnings. The amounts transferred in any

given year might vary depending on the severity of downward

fluctuations. For areas experiencing increasing export earnings,

outlays could be zero.

The program could be administratively cumbersome, however.

For example, considering the amount of time necessary for Congressional authorizations and appropriations, it would be difficult to

plan the arrival of the funds at the time most appropriate to

relieve the problem. Multi-year budgeting might make this alternative administratively more feasible. Also, it might be possible

to set up a fund in the Executive Branch in which Executive

officials would have discretion to spend the funds specifically

for alleviation of export earnings difficulties.

The distribution of U.S. foreign economic assistance among

groups of LDCs and among LDC commodity producers for fiscal

year 1977 is presented in Table 8. The middle-income LDCs (including both commodity producers and all LDCs) receive the largest

amount of U.S. economic assistance, whether measured in total

U.S. dollars transferred, or by dollars per capita. For LDCs

overall, and for commodity-producing LDCs, the smallest amounts by

total dollars and on a per capita basis accrue to the high-income

18/ International Bank for ELeconstruction and Development,

Memorandum, "Compensatory Financing: A Quantitative Analysis," December 1975, pp. 1-4.

28
TABLE 8. DISTRIBUTION OF U.S. FOREIGN ECONOMIC ASSISTANCE AMONG

GROUPS OF LDCS a/: ESTIMATED FOR FISCAL YEAR 1977

Countries by

Income Group

Total U.S.

Economic

Assistance

(Millions

of Dollars)

U.S. Aid in

Recipient

Countries

(Dollars Per

Capita)

Percent

Change b/

Commodity-Exporting LDCs

Low-Income Countries

(Below $200 GNP Per Capita) 737

Middle-Income Countries

($200-$500 GNP Per Capita) 1,193

High-Income Countries

(Over $500 GNP Per Capita) 119

.7

5.5

0.4

50

55

565

All LDCs

Low-Income Countries

(Below $200 GNP Per Capita) 946

Middle-Income Countries

($200-$500 GNP Per Capita) 1,548

High-Income Countries d_/

(Over $500 GNP Per Capita) 950

0.9

4.7

l.i

£./

SOURCE: Agency for International Development, Fiscal Year 1977

Summary.

a/ Includes A.I.D., Peace Corps, P.L. 480, and International

Narcotics Control.

b/ Percent change in assistance required to compensate for 10

percent shortfall in UNCTAD commodity earnings, and based on

1973 commodity earnings, which are the latest data available.

_£/ Not applicable.

_d/ If Israel were excluded from the calculations, total U.S.

economic assistance would be $272 million and U.S. aid in

dollars per capita would be $0.5.

29
LDCs. 19/ If the United States were to compensate LDCs for a

ten-percent decrease in commodity earnings for UNCTAD products, it

would require an increase in current foreign economic assistance

levels of 50 percent for the poorest countries, 55 percent for the

middle-income LDCs, and 565 percent for the high-income LDCs.

19/ Israel is not considered here because the volume of U.S.

aid to that country is greatly out of proportion with aid to

other LDCs. Its inclusion in these calculations would

therefore distort the estimates.

30
CHAPTER III. COMPARISON OF THE ALTERNATIVES' EFFECTS

Beyond determining what nations would benefit from which

policy option for stabilizing the export earnings of less developed countries, five other factors must be weighed:

o What might be the impacts on U.S. producers and consumers?

o Who would control the distribution of benefits?

o Would the distribution of benefits further the U.S. foreign

assistance program's so-called "New Directions" aim?

That is, would it help the poorest people? _!_/

o What might be the effects on political relations between

the United States and LDCs?

o What would be the budgetary cost to the United States?

A discussion of these five questions and their interrelationships

follows.

IMPACTS ON U.S. PRODUCERS AND CONSUMERS

Because of its potential to affect the prices of numerous

imported commodities, the integrated program could have a great

impact on U.S. producers and consumers. The magnitude and direction of its effect on price movements would depend on the

terms of agreement and on the normal price and supply fluctuations

for each commodity.

Case by case, the impact of an international commodity

agreement on U.S. producers and consumers depends in large part on

whether the United States is a major importer of the commodity in

question. If the United States is also a major producer of the

commodity, the nation could conceivably, through domestic price

_!/ For a more detailed treatment of "New Directions", see "Bilateral Development Assistance: Background and Options,"

CBO Budget Issue Paper, February 1977.

31
controls and trade restrictions, insulate its domestic industry

from the world price. The impact on U.S. consumers depends

not on whether the price setting mechanism includes an international commodity agreement, but on the level and degree of

fluctuation of the price and supply.

Unlike commodity agreement proposals, changes in amounts

of compensatory finance available through the IMF would have

virtually no impact on U.S. producers and consumers (provided

the transaction were not financed by inflationary creation of

Special Drawing Rights or borrowing from the U.S. Treasury).

Compensatory foreign assistance could affect U.S. producers and

consumers adversely if it had to be financed through an increase

in taxes or in the budget deficit. If LDCs used the funds to

purchase additional U.S. goods and services, compensatory foreign

assistance could even benefit U.S. firms producing for export.

CONTROL OF BENEFIT DISTRIBUTION

Depending on market conditions and on the terms negotiated,

international commodity agreements, whether controlled by UNCTAD

or by individual commodity organizations, have automatic transfers. How much Congressional oversight would be possible for

these accords is unclear. Past, agreements such as the international coffee pacts have had built-in provisions for renegotiation after five years. The procedure for withdrawing prior to

expiration of the agreement is undefined. This would mean essentially that control of the distribution of benefits would be in

the hands of government or private recipient groups in the

producer countries and, where applicable, to a buffer stock

manager acting within the constraints defined by the agreement.

Similarly, compensatory finance represents an automatic short-term

transfer—in this case, from the fund to the recipient government.

The level and distribution of foreign assistance among

countries can be controlled by the United States. There is also

opportunity for yearly reevaluation of the level and justification

for short-term foreign assistance payments.

DISTRIBUTION AND THE NEW DIRECTIONS OBJECTIVE

How close any of these options come to achieving the New

Directions objective of helping the poorest people depends

not only on whether the poorest countries benefit, but also on

how the potential benefits are distributed within countries.

32
In terms of how much is available to poor countries, compensatory

finance could transfer the most in terms of total dollars. How

much stabilization of prices for UNCTAD products would benefit the

poorest countries would depend on the magnitude of earnings fluctuations resulting from commodity price fluctuations. The degree

to which foreign assistance payments could help stabilize export

earnings for the poorest countries would depend on the pattern of

earnings fluctuations and on how much the U.S. government would be

willing to extend for this purpose.

Whether benefits from these alternative policies would be

distributed to poor people within low-, middle-, or higher-income

LDCs largely depends upon how recipient governments use those

benefits. Payments under the IMF compensatory finance scheme

go exclusively to recipient governments. U.S. foreign assistance either goes directly to recipient governments or, if it

is extended to private recipients, must be agreed to by LDC

governments.

Payments for commodities are made not only to LDC governments, but also to multinational corporations and, less frequently, to smaller enterprises owned by private LDC citizens.

The payment/recipient pattern varies from commodity to commodity.

The degree to which the benefits of the UNCTAD commodity program,

or individual commodity agreements, would be distributed to the

poorest groups within LDCs would depend on spending and investment

decisions by these various actors.

There is no sure way of predicting whether LDC governments

(or in the case of commodity agreements, multinational corporations or private entrepreneurs) would distribute the benefits of

alternative stabilization programs to their poorest citizens.

Since stabilization mechanisms other than foreign aid would

necessarily be automatic, the U.S. government would have little

influence over the distribution of benefits within LDCs. Only in

the cases of changes in foreign aid would the United States have

the opportunity to make benefits conditional on the grounds that

they go to the poor.

EFFECTS ON POLITICAL RELATIONSHIPS

Because LDCs supply the United States with large amounts of

many raw materials, such countries have a certain leverage.

Although it is unlikely that other groups of LDCs could repeat

33
the success of OPEC in raising oil prices in 1973, short-term

interruptions in supply could well have a marked negative impact

on the U.S. economy. 2J

The UNCTAD program for commodities is an integral part of

what LDCs themselves consider crucial to their plans for economic

development. Increased availability of compensatory finance has

been viewed by many LDCs as a companion program to—but not a

substitute for—commodity agreements, which provide compensation

to countries that are not large producers of primary products.

Many LDCs prefer commodity agreements that could prevent export

earnings shortfalls. Compensatory finance is a means of making

up for the results of the problem, but it would do little to

prevent the export earnings fluctuations. Rejection of these

proposals could have significant repercussions on U.S./LDC relations. The opposition of the LDCs at UNCTAD IV to U.S. proposals

for an international resources bank is an example of likely political ramifications from U.S. initiatives to assist LDCs.

The United States can agree to specific commodity agreements

as a political reward for particularly friendly LDCs. The wealthier LDCs that turn out to be prime beneficiaries of a particular

commodity agreement may also be those that the United States is

most interested in supporting politically. For example, the U.S.

decision to join the Fifth International Tin Agreement was based

on two factors: that there would be no detrimental economic

effects for the United States; and that the political benefits

would be substantial. This latter point relates to the fact that,

of the seven producer members of the International Tin Agreement,

six are LDCs—Malaysia, Bolivia, Indonesia, Thailand, Nigeria, and

Zaire. Politically, these nations are generally moderate, and

some people have stressed the importance of keeping the policies

of these LDCs in a moderate vein. A similar argument also helps

to explain U.S. interest in a commodity agreement for copper,

given that the major copper producers—Zambia., Zaire, Peru, and

Chile—are LDCs with which the United States seeks continued

cooperation.

Whether political difficulties with LDCs would follow from

a U.S. proposal to utilize foreign assistance as a tool for

stabilizing export earnings would depend to some extent on what

2/ See "U.S. Raw Materials Policy: Problems and Possible Solutions," CBO Background Paper No. 16, December 28, 1976.

34
conditions were attached to the arrangement. LDCs usually prefer

an automatic transfer, while the United States prefers to specify

the purposes for which the money will be spent.

THE BUDGETARY COST TO THE UNITED STATES

The budgetary cost of international commodity agreements

can be discussed in terms of the cost of the entire integrated

program including 18 commodities, compared to the cost of individual agreements for the 10 core commodities discussed in the

preceding chapter. According to UNCTAD, a $6 billion fund could

be necessary to finance the integrated program. _3/ Of this sum,

$3 billion would be required initially, and an additional $3

billion would likely be needed later, depending on the magnitude

and degree of synchronization of price fluctuations in the 18

commodities. This estimate is based on UNCTAD assumptions concerning which commodities would need initial support and what size

of buffer stocks would be necessary to stabilize the markets for

these commodities. Of the initial $3 billion, $1 billion would be

financed by paid-in capital contributions and $2 billion from

government loans, international financial institutions, and

private capital markets. The U.S. share could be from $200

million to $400 million, some of which might take the form of

callable capital. (Callable capital would not need to be paid in

unless the fund was unable to meet its obligations to its bondholders.) These calculations are based on the assumption that

both exporters and importers share in the cost, and that shares of

cost are calculated according to shares of exports and imports.

The U.S. share of the additional $3 billion would be the same as

the share required for the initial sum. The total costs to the

United States of the integrated program, therefore, could amount

to $400 million to $800 million over several years.

In order to finance U.S. participation in individual agreements for the core commodities, again based on UNCTAD assumptions

as to the appropriate size of buffers, the cost could be $400

million to $600 million in paid-in capital. For purposes of

Since the cost of the integrated program includes costs

for accumulating the buffer stocks for various commodities,

the exact cost of the integrated program would depend on

the pattern of commodity price fluctuations at the time the

buffer stock is purchased.

35
comparison, these initial amounts necessary for an integrated

program or an individual agreement would be equivalent to roughly

one-third, of the fiscal year 1977 U.S. appropriations to international financial institutions.

It should be emphasized that there is considerable argument

about whether the size of the buffer stocks recommended by UNCTAD

would, in fact, be sufficient to stabilize the commodity markets.

For example, a U.S. Treasury Department simulation concluded that

a buffer of four million metric tons of copper would be necessary

to minimize price fluctuations for copper to plus or minus 15

percent. UNCTAD estimates (and those used to compute the cost

estimates included in this paper) for a copper buffer were 560,000

to 740,000 metric tons. Analysis by the Organization for Economic

Cooperation and Development is consistent with UNCTAD estimates.

The amount available for the International Monetary Fund's

compensatory finance fund could be expanded by increasing IMF

member countries' overall quotas in the IMF. Such an increase

in IMF quotas requires Congressional authorization, but no appropriation.. The quota increase would involve a transfer of dollars

from the U.S. Treasury to the IMF, but under current regulations,

these dollars transferred to the IMF would continue to be counted

as liquid U.S. Treasury assets. Without lengthy international

negotiations, IMF quotas cannot be increased beyond the 30 percent

already scheduled to come into effect in June 1977.

The cost of utilizing foreign assistance as a means of

stabilizing export earnings would depend very much on which

individual countries the United States decided to support. If,

however, the United States were to choose to finance a 10 percent

drop in export earnings for the UNCTAD commodities (based on

commodity earnings for 1973), it could require a 50 percent

increase in fiscal year 1977 foreign economic assistance payments

to commodity-producing low-income LDCs, a 55 percent increase for

middle-income LDCs, and a 565 percent increase for high-income

LDCs. In dollars, this amounts to approximately $370 million for

the low-income group, $530 million for the middle-income group,

and $670 million for the high-income group. It should be noted

that these costs represent a unilateral effort by the United

States, whereas the costs of commodity agreements and compensatory

finance represent the U.S. share of a multilateral effort.

36
APPENDIXES

APPENDIX A. COMMODITY-EXPORTING LDCs BY INCOME GROUP I/

Less Than $200 GNP Per Capita

Afghanistan

Bangladesh

Benin (Dahomey)

Burma

Central African Republic

Chad

Ethiopia

Gambia

Haiti

India

Indonesia (oil exporter)

Kenya

Madagascar (Malagasy Republic)

Malawi

Mali

Mauritania

Niger

Rwanda

Sierra Leone

Somalia

Sri Lanka

Sudan

Tanzania

Togo

Uganda

Upper Volta

Yemen Arab Republic

Zaire

Greater Than $500 GNP Per Capita

Argentina

Barbados

Brazil

Chile

Costa Rica

Dominican Republic

Fiji

Gabon (oil exporter)

$200-$500 GNP Per Capita

Bolivia

Cameroon

Colombia

Congo (People's Republic of)

Ecuador (oil exporter)

Egypt (Arab Republic of)

El Salvador

Ghana

Guatemala

Guyana

Honduras

Ivory Coast

Liberia

Mauritius

Morocco

Papua New Guinea

Paraguay

Philippines

Senegal

St. Lucia

Thailand

Tunisia

Western Samoa

Zambia

Jamaica

Malaysia

Nicaragua

Panama

Peru

Surinam

Turkey

Uruguay

I/ Based on World Bank Atlas, 1975.

39

APPENDIX B. ABOUT THE DATA

The data for total exports, exports by commodity, and

exchange rates are taken from the June 1976 issue of International

Financial Statistics, a publication of the International Monetary

Fund. Where IFS statistics were not available, substitutions were

made from the United Nations Yearbook of International Trade

Statistics, 1974.

The substitutions included:

Meat exports for Chad, 1970.

Cocoa and cotton exports for Benin, 1970.

Tropical timber exports for Indonesia, 1970, 1973.

Coffee exports for Sierra Leone, 1970, 1973.

Iron ore exports for India, 1970, 1973.

Meat exports for Honduras, 1970.

Meat exports for Costa Rica, 1970.

Also, total exports and all commodity breakdowns were substituted

for the following countries:

Yemen Arab Republic

Upper Volta

Saint Lucia

Papua New Guinea

Surinam

Data for GNP for 1970 are taken from "Estimates of GNP for

Non-Communist Countries," Agency for International Development,

April 1, 1972. GNP data for 1973 are from World Bank Atlas,

1975. Population data for both years were taken from the Statistical Abstract, 1975.

Data published by the IMF and those published by the United

Nations are sometimes at variance in the numbers for total

exports and for certain commodity exports. If this analysis had

been based on U.N., data instead of IMF data, the export figures

would have been as follows:

41
For 1970, 10 percent of commodity earnings for

the UNTCAD's 18 products would have been approximately $291 million for the poorest countries, no

significant difference for middle-income LDCs,

and $425 million for the high-income LDCs. For

1973, 10 percent of commodity earnings for the

UNCTAD's 18 commodities would have been approximately $379 million for low-income LDCs, $662

million for middle-income LDCs, and $667 million

for high-income LDCs.

In certain cases, the exact commodity classification (based

on the commodities included in the UNCTAD resolution) was unavailable, or was not broken down in sufficient detail to pick up

the specific commodity. For example, sometimes figures are given

for oilseeds, nuts, or kernels as a group, but not for oilseeds

specifically. In such cases, figures for the entire category are

used. The countries for which this was done are:

Sri Lanka: Entries for vegetable oil include all

coconut products.

Benin: Entries for vegetable oils include all palm

products.

Zaire: Entries for tin include tin and cassiterite.

Gambia: Entries for vegetable oils include groundnut products.

Niger: Entries for vegetable oils include groundnuts.

Philippines: Entries for vegetable oils include all

coconut products.

Senegal: Entries for vegetable oils include groundnuts and oil.

Fiji: Entries for vegetable oils include coconut

and products.

In some instances, data were unavailable from either source.

Export data was unavailable in the following cases:

42
Chad: meat for 1973.

Benin: cocoa and cotton for 1973.

Upper Volta: cotton and vegetable oil for 1973..

Honduras: meat for 1973.

Congo: tropical timber for 1973.

Costa Rica: meat for 1973.

Yemen Arab Republic: cotton for 1970.

Papua New Guinea: tropical timber for 1973.

Population data were not included in the following cases:

Central African Republic, 1973.

Madagascar (Malagasy Republic), 1973.

Indonesia, 1970.

Yemen Arab Republic, 1973.

Gross National Product data were not included in the following

cases:

Western Samoa, 1970.

Fiji, 1970.

Saint Lucia, 1970.

Papua New Guinea, 1970.

Data for some countries are not published in either IFS or

by the U.N. Some examples are Botswana and Guinea.

Information for developed countries is for 1973 unless

otherwise noted. Population and GNP figures are from World Bank

Atlas, 1975.

O

43