metadata: authors: 0: author: Yeats,Alexander James
docna: 0: docna: Do natural resource-based industrialization
            strategies convey important (unrecognized) price benefits
            for commodity-exporting developing countries?
docty: Policy Research Working Paper
subtopic: Mining & Extractive Industry (Non-Energy),Oil Refining & Gas Industry,International Trade and Trade Rules,Trade and Services,Energy and Mining
teratopic: International Economics and Trade
abstracts: cdata!: Two objectives of international
            commodity policy have been to reduce instability in
            exporter's earnings and importer's prices through
            international (buffer stock) agreements and to encourage
            further processing of domestically produced commodities by
            developing countries. However, it appears that little
            attention has been given to potential interrelations between
            these objectives. Using the World Bank's commodity
            processing classification scheme this study shows that a
            major structural shift occurred from the mid-1960s to late
            1980s in the composition of developing countries'
            exports toward most processed commodities, and this change
            was reflected to varying degrees in all major developed
            country import markets. However, the developing countries
            actually responsible for the further processing often were
            not major producers of the primary commodity. This finding
            suggests that internal constraints to commodity processing
            may often be more important than external barriers like
            escalating tariffs. This study also established that the
            shift resulted in developing countries receiving
            considerably more stable agricultural materials and ores and
            metals export prices--and to a lesser extent prices for
            foodstuffs--as well as more favorable long-term price
            changes. Both factors should further enhance efforts by
            developing countries to encourage local processing of
            domestically produced primary commodities.
repnme: repnme: Do natural resource-based industrialization
            strategies convey important (unrecognized) price benefits
            for commodity-exporting developing countries?
display_title: Do natural resource-based
            industrialization strategies convey important (unrecognized)
            price benefits for commodity-exporting developing countries
listing_relative_url: /research/1991/01/700102/natural-resource-based-industrialization-strategies-convey-important-unrecognized-price-benefits-commodity-exporting-developing-countries
topicv3: Trade m1326924 698,Trade in Services m1326928 780,Iron m1503514 2931,Nickel m1503517 2935,Petroleum Industry m1583790 4710
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: Policy, Research & Ect Affairs
no_of_pages: 35
author_keys: 0: author_key: 93582
model_extractions: **Policy, Research, and External Affairs**

International Trade WPS 580 ' pli ivr -- a product of the Intemational Trade Division, Intcmational Economics Department- is part nla ltLarur efl'ort in PRE' to analyze and predict important structural changes in world tradc as well as to id' mi i tiactors aff'ectirng developing countries' cxport camings. Copies arc available free from the World B ank. 1~ l 8 I I Strcet NWA', Washington DC 20433. **Please** contact Jean ;acobson, room S8-037, extension **3-,I1) pa!g1; es).** D)kvcloping countries have long had two main ohjeCtivrcs in tenns of comnmodity exports: to rcdL;ce instability in exporters' carnings and importers' prices through international (buffer stock) aurecments and to encourage more prrcesing of domestically produced commodi- **tic-** h1⁄4 devcloping countries.

Liltic attention seems to have been paid to po>sible cornniections between these objectives. If' processcd commnodities are traded in markeLs that **arC** gTCnerally more stable, for example, and il tlicsc **it' nis** experictce more favorable longer p'lm pricc trcrnids, might a natural resource-based i i/alion strateg not convcy' important **S . : .m:. ia** J **)** price hcnctits for commodiityd. ( sloping eountrics?

**w** i **fl** a K cmii ficant number ofcdeveloping arc Shifting tlhcir composition of ,:'2~> j!wiv. ard processed commodities - and if n j k .uts !or thCse itcnms are less unstable - i d is lot alter the priority' attached to i.i. COmmmodit,, price stabilization

Using the World Bank's commodityprocessing classification scheme, Yeats shows that a major structural shift in commodity trade occurred between 1965 and 1987. Almost all regional groups of developing countrics shifted from primary commodity exports to more processed commodities - except for foodstuffs -and this change was reflected to varying degrees in all major developed-country import markets.

But the developing countries actually rcsponsible for the further processing (such as the Asian NlCs) were often not major producers of the primary (unprocessed) commodity. T'his sugoests that internal constraints on commiiiodity processing may of'ten be more important than such external barriers as escalating tariffs.

Thc shift has gencrally' reduced instability in export carnings for agricultural materials, orcs, and metals - and to a lesser cxtent for foodstuffs - and has resulted in more favorable long-term price trends.

I!i'i' 17' \F rktig Pa per Series disserninates the Findings of work under way in the Bank's Po licy, Research, and External A X.(':p'x: **An** ih je.cti e ofthe serics is to get the se findings out quickly, **ev en** if prcsentations are less than fully polished. :!'terrTeti ns. and conclusions in these p;tpers do not necessarily represent official **Bank** policy.

i'. , **.. (** fi, Pk'E: **F11.t1 r:,;T** .S.TrLl.
Do Natural Resource-Based Industrialization Strategies Convey Important (Unrecognized) Price Benefits for Commodity Exporting Developing Countries?

by Alexander J, Yeats

# Table of Ccntents

|1.<br>Introduction|I|
|---|---|
|11.<br>The Methodological Approach|3|
|Ill.<br>Secular Changes in Commodity Trade|5|
|IV.<br>Price Formation for Primary and Processed Commodities|1 9|
|V<br>Summary and Conclusion|23|
|References|25|
|Appendix|2 7|
Do Nat **al** Resource-Based Industrialization Strategies Convey Important (Unreco' ._zed) Price Benefits for Commodity<sup>Exporting Developing Countries?</sup>

# Alexander J. Yeatsl

# I. Introduction

Developing countries have long had two policy objectives relating to comnmodity price stability and domestic processing. Concerning the former, "buffer stock" agreements or export<sup>earnings stabilization</sup> schemes like STABEX have been designed to offset unstable primary commodity prices which are purported to have detrimental effects on<sup>both producers and consumers.</sup> Second, developing countries have attempted to remove constraints--like escalating tariffs in export markets--to further processing of domestically produced commodities. The rationale for such efforts is that domestic commodity processing can have important employment<sup>creation effects, it may increase trade</sup> contacts and provide benefits associated with "outward-oriented" trade poli.cies, there may be important linkage effects to other<sup>sectors of the economy, and it</sup> may produce an increase in export revenues<sup>and foreign exchange earnings.2</sup> lPrincipal Economist, International Trace Division, The World Bank, Washington. I would like to thank Bela Balassa, Julio Nogu6s and Kenji<sup>Takeuchi</sup> for comments and suggestions.

> 2 See Chapter 3 in Yeats (1981) for a survey of major issues relating to commodity processing and trade. Helleiner and Welwood (1978) or Roemer (1979) provide useful overviews of problems<sup>and prospects for natural resource-based</sup> industrialization. Section D of the Punta del Este (Uruguay Round) Ministerial Declaration states that the "negotiations sha]l aim to achieve the fullest liberalization of trade in natural resource-based products, including in their processed and semiprocessed forms. The negotiations shall aim to reduce or eliminate tariffs and nontariff measures,<sup>including tariff escalation."</sup>
2 In **sp.** e of the effort devoted to these initiatives there appears to have been no consideration given to whether certain complementarities exist between the two policy approaches. Specifically, if prices for semiprocessed or processed commodities oehave differently than those for the primary form then shifting the structure of exports will alter the level and<sup>stability of export</sup> earnings. One possibility is that markets for some processed commodities (such as leather, chocolate, or iron and steel) may be more stable than those<sup>for raw-</sup> form goods, particularly if administered pricing is used in the former or if the demand for these items is relatively more stable. A related question of importance is whether major differences exist in longer-term trends in primary and processed commodity prices. If the latter are more stable and also have a greater secular increase (or less of a decrease) this would be a further attraction for natural resource-based industrialization strategies.

This study has a threefold objective relating to these points. First, an attempt is made to quantify the magnitude of change that occurred in developing country commodity exports from the mid-1960s to the late 1980s. Here, an effort will be made to identify important factors--such as differential changes in demand or develocing countries' competitive position--which produced the structural trade changes. Second, intercountry and interregional differences in export performance will be examined in an attempt to determine whether there were major differences in developing countries' experience. This section also examines longer-term changes in individual developed country import statistics in order to determine if some markets were relatively more open (or closed) to processed commodities. Third, import price (unit value) statistics for primary and processed commodities are analyzed in order to determine whether the structural trade changes which occurred lead to greater (or less) stability and growth in export earnings.
3

# II. The Methodological Approach

In this study **a** World Bank classification scheme was used to identify different **levels of** fabrication for 48 commodities exported in primary and processed form by developed and developing countries. At a minimum, the scheme distinguishes between a primary and processed stage product (i.e., the primary stage of the coffee chain consists of green and roasted beans (SITC 071.1) while the processed stage consists of coffee extracts (SITC 071.2)). In other instances, a semifabricated stage or stages is identified (i.e., the cocoa chain consists of cocoa beans (primary stage), cocoa powder and bvctar (intermediate stages), with chocolate being the final stage item). The appendix provides a description of the processing chain components and also gives their corresponding Standard International Trade Classification (SITC) Revision 1 number.<sup>3</sup> Statistics on developed country imports of each processing chain's components were drawn directly from United Nations Series D trade tapes for 1965,

> 3 1t should be noted that "leakages" may ozcur as one goes up the processing chains in that some products may be employed as inputs for other production processes and be lost from the chain. For example, cotton fiber may be used for the manufacture of rubber tires and not appear ini the textile stages of the cotton chain. Such leakages may cause the magnitude of the shift to processed commodity exports to be understated and may also affect the accuracy of the estimated indices of price stability. If prices for the product where leakages occur are relatively more stable than for goods in the main part of the chain the indices in this study will understate the true degree of stability gained by further processing. Balassa (1968) first developed commodity processing chain concept within the SITC system for analysis of trade and tariff data.
4 1987 and **several** intermediate years.4 In addition, imports from developed and c''veloping c iritries w. e tabulated separately in order to determine **how** the latcer's competitive position (market shares) was changing. Finally, both import value and quantity statistics were drawn for each processing chain stage so unit values could be computed. In general, these unit values were calculated for the most highly aggregate country group possible (i.e., data for the EC(10) would have preference over (say) statistics for France and Germany combined) with tne selection determined by the availab:lity of consistent value and quantity data. Appendix Table 1 lis:s the specific countries that were used for computation of each processing chain's unit values.<sup>5</sup> Once unit values were derived for each processing chain stage two measures **of** price instability were computed. The first instability index was based on the average absolute percentage change in prices from one year to the next while the second was based on the variation that could not be accounted for by a

> 4 The end years 1965 and 1987 were chosen since UN records were incomplete before and after these dates. Also, one would ideally want to analyze trends in commodity exports to all destinaticns but the UN Series D Tapes--the sole source of consistent reccrcds n developing countries' impcrts and exports in term.s of the SITC--have .azcr gacs for South-Scuth and South-East trade. (See Yeats (1990) for an evalua-.:-n of Sob-Saharan African trade data). Due to these limitations the present study had to focus on developing countries' exports to develcped .ountries USing data cc-p;'ee fron the latter's impcrt statistics. Full trade data .eLe rct a.a-lable fcr so,me of the relatlvely unimportant processing chaLns (i.e. , ha r, horn and whalebone, etc.) and these were dropped from the analysis.

> 5 In Appendix Table 1 several S'TC products may be shown within a primary, intermediate, or final stage item. In these -ases, the unit value was an aggregate for all S1TC products listed in the specific stage. For example, the intermediate stege in the cocoa prccessing chain consists of cocoa powder (SITC 072.2) and cocoa bu;ter (072.3). The price for the intermediate stage is a trade weight-ed unit value fcr these compone=nts.
**5**

**rejression trend** line.6 These indices were supplemented by a **measure of longer-** term change based on the average price in 1965-68 and 1985-87.7

III. Secular Chanqes _in Commodity Trade Table 1 presents sumamary information on changes in the structure of developed countries' commodity imports for selected years from 1965 to 1987. Shown **here** are total imports of the primary stage and processed commodities **as** well as similar data for four major subgroups: foodstuffs, agricultural materials, ores and metals, and petroleum. The table also shows the share of the primary stage (unprocessed) commodity in total developing country exports as well as the share of both primary and processed commoc'_ty imports supplied by developing countries.

Table 1 documents two important secular trends in developing countries commodity exports: a shift toward processed form commodities, and also a bSpecifically, the first i.nstability inacex zc:r,puted from, where Ut is the unit value in years t and 1N is the nu'-jer of years for which these data were available. If the commodity's prices were subject to a significant predictable trend equation (1) would overstate the degree of "unexpected" instability. Fcr this reason a linear trend was fitted to the annual price data ar.d the coefficient of determinaticr (R2) used as a measure of unexplained instability. That **is,** the higher the value of R<sup>2</sup> the lower the level of unexplained insstabil.ty.

> 7 The measure of price level change was defined as,

(2) Pl **=(P 85**<sup>**-**</sup> **87** - P65 -68 ) ' P65-68J **x** 10 where P85.87 and P65 -68 represent the average unit value for Lhe processing **stage** over 1965 to 1968 and 1985 to 1987 respectively.
5 Table 1: SECULAR CHANGES IN MAJOR CATEGORIES OF PRIMARY AND PROCESSED COMMDITY IMPORTS OF DEVELOPED COUNTRIES, 1965 to 1987 (Millions of US Do;1crs)

|||Primary|stage i|mports fromn|Proces|sed stage i|mports from|Share of primary stage|
|---|---|---|---|---|---|---|---|---|
|Comaodity group|Year|Developing<br>countries|Atl<br>sources|Developing<br>country share(X|Developing<br>) countries|Atl<br>sources|Devetoping<br>country share(%)|in all<br>devetoping<br>country exports(X)|
|ALL FOODS a|1965|5,912|12,039|49.1|1,646|5,568|29.6|78.2|
||1975|15,279|35,441|43.1|4,754|19,459|24.4|76.3|
||1980|29,453|62,283|47.2|9,066|35,145|25.8|76.4|
||1987|35,193|77,783|45.2|11,236|46,994|23.9|75.8|
|AGRICULTURAL<br>MATERIALS b|1965|2,614|5,092|43.6|963|9,9f5|9.6|73.1|
||1975|4,150|11,104|37.4|4,444|33.367|13.3|48.2|
||1980|10,287|23,161|44.4|12,848|75,593|17.0|44.5|
||1987|8,364|23,095|36.2|24,743|117,594|21.0|25.2|
|ORES, MINERALS AND METALSc|1965|1,901|3,656|52.0|1,641|9,203|17.8|53.7|
||1975|5,677|13,024|43.6|4,245|28,323|15.0|57.2|
||1980|9,192|19,815|46.4|11,577|68,413|16.9|44.3|
||1987|6,738|14,065|47.9|10,938|67,471|16.2|38.1|
|PETROLEUM|1965|6,414|8,037|79.8|1,435|3,411|42.1|81.7|
||1975|78,443|90,307|86.9|7,300|21,452|34.0|91.4|
||1980|202,478|252,321|80.2|23,350|60,979|38.3|89.7|
||1987|73,905|109,295|67.6|20,020|49,241|40.7|78.7|
|^tL COMMODITIES<br>EXCEPT PETROLEU|M 1965|10,427|21,687|48.1|4,251|24,725|17.2|71.0|
||1975|25,106|59,574|42.1|13,444|81,149|16.6|65.1|
||1980|48,932|105,359|46.4|33,491|179,151|18.7|59.4|
||1987|50,294|114,942|43.8|46,919|232,058|20.2|51.7|

- a Food conmoditie" c .'st of primary and processed forms of the foltowing: pork, poultry, bovine meat and mnutton, fish, shellfish, wheat, rice, fruit, vegetables, coffee, cocoa, tea, sugar, groundnuts, copra, palm nuts and kernels, soya bean, linseed, cotton seed, castor seed and tobacco. See Appendlix Table 1 for a List of the primary and processed items in each of these commodity chains.

- b Agricultural material conmodities consist of primary and processed fon-ms of the following: wood, cork, paper-pulpwood, rubber, leather, silk, jute, wool, cotton, flax, hentp and ramie. See Appendix Table 1 for a list of the primary and processed items in each of these coanodity chains.

- Ores, minerat and metals consist of primary and processed forms of the fottowing: phosphate, sulohur, asbestos, glass (quartz sarnv, iron, manganese, copper, nickel, bauxite, lead, zinc, tin, tungsten and sitver. See Appendix Table 1 for a tist of the primary and processed items in each of these comnodity chains.
7 consistent lces of market share for the primary stage commodities. Exclud_ng petroleum, the proportion of primary stage items in tatal commodity exports **fell** almost 20-percentage points over 1965-87 with the largest reduction (73 to 25 percent) occurring for agricultural materials. Including pet i-leum--where the share of the primary stage (crude petroleum) fell from 82 to 79 percent--the decline is less dramatic but the relative importance of the primary stage in total exports still declined by more than 5 points. These data show that developing countries have been achieving a long-standing goal of increasing the relative importance of processed commodity exports.

The second major trend observed in Table 1 relates to a consistent loss in developing countries market share for all the commodity groups' primary sLages as well as the processed stages of foods, ores and metals, and petroleum. Excluding petroleum, the 4.3 point reductioni (from 48.1 to 43.8 percent: in market share translates into a US$4.9 billion lcss in export earnings.8 It also follows that the market share loss was a partial factor causing the relative increase in importance of processed commodity exports. Had this market share remained unchanged (at 48.1 percent) primary stage commodities would have

> 8The gain or loss in export earnings due to changes in developing co,ntries' market share can be a -- oximated from,

(3) Ec = ( Dt when st and so represent their share of total imports in period t and o respectively and Dt is the total value of imports in period t (1987). A second index is sometimes calculated to measure the influence of demand changes on export earnings apart from any variation in competitive position. This measure is defined by, where D0 is the value of imports in period o (1965).
8 accounted for 54.1 percent cf total exports in 1987 as opposed to the actual value of 51.7 percent.

Questions of key importance concern the factors which caused the developing countries' market share losses for the primary Btage commodities. In some cases-particularly involving Sub-Saharan APrica--de.clining productivity and inappropriate government policies imposed major iupply constraints on domestic producers that severely limited their ability to take advantacs of existing export opportunities (see Akiyama and Larson 1989).9 The 1973 **OPrC** price shock and subsequent attempts to influence energy prices by producers also appears to have had longer-term implications as importers of raw matorials attempted to diversify sources of supply. In Japan, and othe; developed countries, this often involved a shift toward stable and "politically safe" countries like Australia, Canada and the United States. Agricultural policies of some developing countries were also a factor in some market share losses. This may have been due to subsidized exports that displaced developina countries from their traditional markets (see Borrell and Duncan 1990 for an analysis of sugar policies) while the expanding European Community also diverted trade from developing to domestic European producers. In some situations--such as the case involving Brazil's hides and skins exports--quotas were placed on the primary stage commodity in an attempt to stimulate further processing. Finally, the fact that developing countries "upgraded" their exports to a greater extent than developed countries may have caused market share losses for the primary stage items.

> 9 The role of external constraints in the decline of African exports has played an insignificant role. Erzan and Svedberg (1989) show that the EC, Japan and the United States impose few irnportant tariffs and NTBs on SuL-Saharan exports and in fact extend major trade preferences to most of these countries through the Lom6 Convention and Generalized System of Preferences.
9 Table 2 takes a more disaggregate look at stru( u.al trade chanqes by analyzing similar statistics for individual comn,odity chains. The results are remarkably consistent throughout the agricultural materials group (and to a lesser extent for ores and metals) where ma,or shifts occurred in the relative importance of processed stage commodities. In cases the shift was particularly dramatic--the share of hides and skins in the leather chain fell from 60.5 to 3 percent, the share of raw cork fell from 72 to about 9 percent--althoug.i these changes often were accompanied by sizable declines in developing counltries market shares for the primary stage products (exceptions occur for pulpwood, silk and hard fibers) . The same general pattern--that of a shift toward processed conmodities ar;d a loss of primary stages market share--occurred in most of the individu,il ore, minerals and metals chains except in the case of nickel where devaloping countrie._: managed both to ai'ieve a sizable increase in both their maacket share for nickel ore (largely due to Indonesia's 1987 exports of US$125 m.li.on) as well as the share of fabricated nickel products in total exports.

For the food commodities a less-consistent picture emerges although the overall share of primary stage items did 'all by almost two and one-half points (to 75.8 percent). ° However, for almost 40 percent of the 19 food proces-.ing chains the share of primary stage commodities increased, and irn two of 'he remaining chains the decline in the relative irrportance of the primary stage l°Several of the tropical product commodities appear ^- have improperly recorded trade, or to have undergone some processing, which explains why imports are reported from developed countries. For example, in 1987 developed countries reported imports of USS355 million in green and roasted coffee beans (071.1) from tile Federal Republic of Germany and US$126 million from Belgium. From the UN data there is no way to determine if this reflects improper recording of entrepot trade or processincg (roasting) of beans in these countries. Similarly, developed countries reported US$102 million of raw or roasted cocoa bean impr,rts from the Netherlands, US$89 million in tea from the United Kingdom, US$7 million in palm nuts from the Netherlands, and US$1.6 million in raw silk from Switzerland.
Table 2: SECULAR CHANGES IN DEVFLOPING COUNTRIES' EXPORTS IN INDIVIDUAL COMMOITY PROCESSING CHAINS, 1965-1987

||Imports<br>developing<br>(millions|from<br>countries<br>of USS)|Share<br>ALL|of developing c<br>stages|ountries<br>Primary|in total develo<br>stage items P|ped coun<br>roce.sed|try inmorts (X)<br>stage products|<br>Share of p<br>all devetopin|rimary stage in<br>g country exports|
|---|---|---|---|---|---|---|---|---|---|---|
|Processing<br>chain|1965|1987|1965|1965-87 chg|1965|1965-87 chg|1965|1965-Z7 chg|1965|1965-87 chq|
|FOOD AND TOBACCO|||||||||||
|Meat|622|2,927|19|-5|7|2|22|-9|8|5|
|Fish eAcept shellfish|<br>82|4,057|9|19|7|19|11|20|70|3|
|Shellfish|182|6,640|46|15|53|11|23|20|90|-4|
|Coffee|2,065|9,822|92|-5|93|-2|9|27|97|-5|
|Cocoa|412|3,286|67|-20|98|-4|18|4|_70_|-35|
|Tea|412|769|95|-14|96|-14|8|16|99|-2|
|Sugar|676|1,213|54|-4|47|9|61|-17|63|-7|
|Wheat|145|43|13|-12|13|-13|3|-1|78|11|
|Rice|132|214|56|-32|36|-11|64|-41|37|-1|
|Groundnuts|'79|369|85|-28|87|-36|80|-3|66|9|
|Copra|328|487|93|-1|96|3|86|5|11|-1|
|Palm nuts and kernels|<br>115|229|87|0|96|-33|47|42|6|2|
|Soya beans|78|1,067|10|13|11|13|6|1|98|-4|
|Linseed|35|4|32|-29|4|-3|76|-61|19|67|
|Cotton seed|'1|25|53|-10|97|-32|23|-3|77|-26|
|Castor seed|42|110|91|1|90|11|92|-2|21|-2|
|Fruit|1,187|9,300|42|3|45|-1|26|20|70|1|
|Vegetables|357|4,152|24|5|24|4|28|3|73|2|
|Tobacco|370|1,77a|35|-9|40|5|2|0|96|-41|
|AGRICULTURAL MATERIALS|||||||||||
|Wood|740|8,612|22|9|51|-1|13|14|55|-21|
|Cork|10|1S|13|-10|30|-25|5|-2|72|-64|
|Pulpwood|22|1,696|1|3|4|2|0|3|29|-26|
|Rubber|656|4,220|42|-19|66|-18|1|_12_|99|-39|
|Leather|255|11,123|19|22|28|-18|12|33|61|-58|
|Silk|46|,24|30|26|61|38|12|36|76|-47|
|Jute|389|_260_|86|-2|86|-2|82|2|40|-33|
|Yoot|258|584|10|-2|13|-8|7|3|67|-50|
|Cotton|1,140|5,407|50|-8|69|-15|23|15|82|-50|
|Flax, henp and ramie|9|175|7|19|10|27|42|-31|97|-14|
Table 2: SECU[AR CHANGES IN DEVELOPING COUNTRIES' EXPORTS IN INDIVIDUAL COMMODITY PROCESSING CHAINS, 1965-1987 (Cont'd)

||Imports<br>f<br>Developing<br> <br>(njllions<br>o|rom<br>Countries<br>f USS)|Share<br>All|of developing<br>c<br>stages|ountries<br>Primary|in total<br>develop<br>stage<br>items<br>Pr|ed<br>countr<br>ocessed<br>|y<br>inports<br>(X)<br>stage<br>products|Share of p<br>all<br>developing|rimary<br>stage<br>in<br>country<br>exports|
|---|---|---|---|---|---|---|---|---|---|---|
|Processing<br>Chain|1965|1987|1965|1965-87 chg|1965|1965-87 chg|1965|1965-87 chg|1965|1965-87<br>chg|
|ORES, MINERALS AND METALS|||||||||||
|Phosphate|210|1,002|51|2|64|-4|4|33|98|-35|
|SuLphur|35|117|22|-5|26|-3|0|1|100|-1|
|Asbestos|27|60|8|-1|11|2|3|1|89|-35|
|Glass|8|574|2|6|3|1|2|6|11|-9|
|Iron|876|5,065|18|-1|53|0|2|6|93|-33|
|Manganese|160|155|55|-29|74|-24|12|-|93|-5|
|Copper|1,131|4,297|45|-9|65|-7|43|-11|13|15|
|NickeL|2|255|0|10|1|19|0|6|100|-44|
|Bauxite|319|3,560|23|-4|86|-11|8|8|72|-53|
|Lead|_127_|392|31|-3|41|6|27|-14|41|33|
|Zinc|127|416|27|-10|45|-20|13|-2|75|-13|
|Tin|426|752|72|4|94|-24|64|12|34|-26|
|Tungsten|25|38|47|-23|57|8|8|-1|96|-19|
|Si l ver|68|794|23|11|2|28|28|6|3|14|
* 1 2

commodity exports **is** accounted for by the fall in market share for these items.<sup>11</sup> In other words, had developing countries' market shares remained at their 1965 levels the relative importance of primary stage exports would have risen rather than fallen for the rice and tea processing chains.

While the previous analysis demonstrated that there has been a secular shift in developing countries' exports toward processed commodities, two questions of importance concern the contribution of different developed country markets to this shift and, second, the extent to which different developing countries have participated. Table 3 is addressed to the first issue and examines major developed country commodity imports over 1965-87. Specifically, the table shows the value of 13 countries' (or country groups) 1987 imports of major commodity groups as well as the 1987 share of primary stage (unprocessed) commodities in this total. To indicate the shift in relative importance, the lower third of the table shows the 1965-87 change in the share of primary stage items in total commodity imports.

With one or two exceptions Table 3 shows that the sizable shift toward trade in processed commodities extends to all the developed countries and occurs over all major commodity groups. Due largely to ores, minerals and metals the share of unprocessed items in Australia and New Zealand's total commodity import fell by more than 30-percentage points while the corresponding decline for Japan lAside from the normal reasons often advanced in support of further commodity processing in developing countries there is an additional potentially important consideration relating to food products in that further processing generally means increased preservation or an extension of the useful life of the commodity (grains may be an exception to this general rule). As such, further processing may be a useful way of combatting the major problem of food spoilage in some developing countries. Data compiled by Olechowski (1987), Yeats (1979) and Laird and Yeats (1990) suggest that escalating tariffs and nontariff barriers in developed country markets are one reason why developing countries have difficulties in processing food commodities for export.
13 Table 3: STRUCTURAL CHANCES IN DEVELOPED COUNTRIES IMPORTS Of PRIMARY AND PROCESSED COMMODITIES FROM DEVELOPING COUNTRIES, 1965-187

||||Commodity product group<br> <br>||
|---|---|---|---|---|
|||Ag|ricultural Ores, minerals<br>All comoditi|es|
|Importing country|Foodstuffs|m|ateriats<br>and metats<br>Inct. petroleum Ex|ct. petroteum|
||(1987 va|lu|e of all irrports<br>in USS miLtion)||
|ALL DEVELOPED COUNTRIES|46,429||33,107<br>17,676<br>191,138|97,213|
|Austratia|476||677<br>82<br>2,254|1,235|
|Austria|460||276<br>51<br>1,264|787|
|Canada|1,005||874<br>369<br>3,307|2,248|
|European Community(10)|<br>18,378||12,143<br>6,706<br>64,691|37,228|
|Fintand|411||141<br>48<br>737|600|
|Japan|8,957||6,972<br>5,507<br>46,994|21,435|
|New Zealand|125||106<br>51<br>559|282|
|Norway|284||122<br>207<br>649|612|
|PortugaL|334||451<br>73<br>1,890|857|
|Spain|1,448||755<br>531<br>7,623|2,734|
|Sweden|629||322<br>111<br>1,456|1,062|
|SwitzerLand|675||325<br>33<br>1,283|1,032|
|United States|13.232||9,938<br>3,908<br>58,409|27,079|
||(1987 sh|ar|e of unprocessed<br>commodities in total imports)||
|ALL DEVELOPED COUNTRIES|<br>75||25<br>38<br>65|52|
|Australia|62||6<br>18<br>40|28|
|Austria|81||22<br>48<br>72|58|
|Canada|68||12<br>44<br>54|42|
|European Cornunity(10)|<br>79||22<br>42<br>66|54|
|Fintand|87||11<br>53<br>73|67|
|Japan|74||52<br>47<br>69|60|
|New ZeaLand|67||8<br>10<br>56|35|
|Norway|87||9<br>14<br>49|47|
|Portugal|98||68<br>34<br>88|77|
|<br>Spain|88||54<br>85<br>89|78|
|<br>Sweden|82||14<br>35<br>68|57|
|SwitzerLand|75||27<br>1<br>65|58|
|United States|71||9<br>15<br>58|58|
||(1965-8<br>|7 c<br>|hange in share of unprocessed comnodities)<br> <br> <br>||
|ALL DEVELOPED COUNTRIES|<br>-3||-48<br>-16<br>-10|-19|
|Austratia|-32||-15<br>-45<br>-22|-34|
|Austria|4||-65<br>-11<br>-4|-18|
|Canada|-20||-31<br>-32<br>-27|-35|
|European Cormunity(10|)<br>-1||-54<br>-8<br>-13|-17|
|FinLand|-12||-63<br>34<br>-13|-18|
|Japan|-1||-46<br>-41<br>-17|-28|
|<br>New Zealand|-29||-12<br>_-73_<br>_-1_|-31|
|Norway|-8||-34<br>-17<br>-22|-21|
|Portugat|18||-30<br>-33<br>1|-12|
|Spain|30||-40<br>23<br>8|-11|
|Sweden|-13||-33<br>13<br>9|-11|
|Switzerland|-4||-56<br>-3<br>-7|-15|
|<br>United States|-3||-40<br>-24<br>-3|-5|
14 was 28 points. Table 3 also shows that all developed countries participated in the sizable (relative) decline in the importance of unprocessed agricultural material imports with the share of these items falling by SO points or more for Austria, EC(10), Finland and Switzerland.<sup>12</sup> In spite of the broad-based reductions that occurred in the importance of unprocessed cormodity imports, Table 3 shows that manor differences still persist in the trade structure of individual developed countries. Among the largest importers, 60 percent of Japan's total nonpetroleum imports still consist of primary stage commodities--in spite of the 28-percentage point decline that occurred in the relative share of these items over 1965-1987. There is fairly strong evidence that Japan's bias against processed commodity imports is due, at least in part, to the structure of its trade barriers as Yeats (1987, Table 15.2, pages 114-115) shows it has the highest tariff escalation index for the 10-OECD countries for which comparisons are made.

While the previous analysis showed that the structural shift toward processed commodity imports occurred irn all major developed ccuntry markets, Table 4 examines the extent of this change for various regional groups of develcpnig countr es. Spec fically, the table shows the total food, agricultural material, ores and met3l.s, and petroleum exports of ten regional groups of developing countries (the Latin American Integration Association--better known

> 12 Spain and Austria both import a considerably higher proportion of v.nprccessed fcod products in 1987 than they did ;.n 1965. Spanish imports of c.ffee beans increased more than eightfold (to US$350 million) as these raw-form procucts (from developing countries) were substituted for coffee blends and extracts originally produced in EFTA and the EC. This, plus an increase of about US$500 million in imports of soya bean and fresh shellfish, accounts almost entirely for the increase in Spain's primary product import ratio. Similarly, the Austrian increase is accounted for by a US$171 million rise in coffee bean imports (from US$16 million in 1965) and a rise of US$100 million in fresh fruit imports from developing countries.
**i-li**

Table 4: SIRUFTIIPAI CHAN(;[S IN StLFCTH) a JFLOPING COIJUIRY GROUPS COMMODITY EXPORTS, 1965-1987

||Tota[|<br>|Exporter's|share ofaltd|evetoped countr|y imports (X)|Share of pr|imary stage in|
|---|---|---|---|---|---|---|---|---|
||VaIuJe_f<br>expo|rts<br>(US$')|Prima|ry stage|Processe|d conmmodities|totat<br>cornno|dity exports**(X)**|
|Commowdity grupIReq,nal<br>exp.rtr<br>0|19,5|19V7|1965|1965-87 chg|1965|1965-87 chg|1965|<br>1965-87 chg|
|FOODSTUF<br>FS|||||||||
|ALADI|1,<br>7|11,234|10.4|-0.5|11.1|-3.5|67|1|
|AndeanGroup|7'.'.|4,2?1|5.8|_-0O7_|1.1|-0.6|92|2|
|CARICnM|1!'/|433|1.3|-0.8|0.5|-0.4|85|5|
|Other Ameri-a|4k.'|2,448|2.4|0.3|2.0|-1.3|73|13|
|Sub-Saharan A+Fita|_1,7f2_|6,813|12.8|-5.0|2.9|-1.3|91|-2|
|North Africa|3??|1,043|2.3|-1.2|0.9|-0.5|85|-4|
|WestAsia|215|1,555|_1.7_|0.0|0.1|0.4|96|-11|
|ASFAN||6Y.N<br>6,149|3.2|1.7|4.5|0.5|61|1|
|Other As.a and China|_7",_|S,642|5.4|0.2|1.6|1.1|88|-10|
|Developirg<br>t(ranra|56|4S6|0.7|-0.2|0.3|-0.1|83|1|
|AGRICULTURAL<br>MATFRIA1S|||||||||
|ALADI||4,610|9.1|-6.9|0.6|2.9|90|-79|
|Andean Gr-o)up||_277_|1.2|-1.0|--|0.2|89|-71|
|CARICOM|li|15|0.1|-0.1|--|--|61|-40|
|Other<br>Am(erira|4|66|--|--|--|--|43|-29|
|Sub-Saharan Atrira|',,|2,148|7.4|<br>-1.0|0.8|_-0.2_|84|-16|
|North Afr-ic.a|_187_|776|2.7|-1.3|0.3|0.1|85|-46|
|WestAsia|1'v3|1,199|3.1|-1.9|--|0.8|97|-72|
|ASEAN|815f|8,256|12.0|6.4|1.0|2.4|88|-37|
|Other Asia and China|88t|10,663|5.6|-0.6|5.5|2.6|38|-27|
|Developing<br>Oceania|4|145|--|0.6|--|--|46|44|
|ORES, MINERALS ANDMfTALS|||||||||
|ALADI|81,0|5,868|8.9|8.3|5.6|-0.5|39|2|
|Andean Grour)|437|1,732|7.9|<br>-2.8|1.6|-0.1|66|-25|
|CARICOM|186|482|4.2|-2.8|0.3|0.1|83|-41|
|Other America|73|288|1.9|-1.6|--|0.4|97|-80|
|Sub-Saharan Af-ira|980|_2,762_|11.0|-3.1|6.3|-3.9|41|-1|
|North Africa|2?5|840|6.6|-3.6|0.1|0.5|95|-45|
|West Asia|S,'|596|0.8|-0.3|0.3|0.5|55|-43|
|ASEAN|_362_|1,660|4.2|1.1|2.2|-0.8|43|2|
|Other<br>Asia andChina|_252_|1,875|5.0|-1.0|_0.7_|_1.2_|73|-43|
|Developirng<br>O)cean)a|_e7_|454|1.8|1.3|--|--|100|-1|
Table 4: STRUCTURAL CHANGES IN SELECTED DEVELOPING COUNTRY GROUPS C04MMODITY EXPORTS, 1965-1987 (Cont d)

||Tota<br>Value of exp|l<br>E<br>orts (USSmn)|xporter'<br>Prim|s share of all de<br>ary stage|veloped count<br>Processe|ry imports (X)<br>d commodities|<br>Share of pr<br>totat commod|imary stage in<br>ity exports (X)|
|---|---|---|---|---|---|---|---|---|
|Commodity Group/Regional Exporterd|<br>1965|1987|1965|1965-87 chg|1965|1965-87 chg|1965|<br>1965-87 chg|
|PETROLEUM|||||||||
|ALADI|84|8,403|0.5|<br>6.3|1.3|0.7|48|41|
|Andean Group|1,702|8,486|13.2|<br>-8.4|18.8|-12.1|62|-1|
|CARICOM|200|1,063|0.1|<br>0.4|5.6|-4.6|4|47|
|Other America|469|642|0.1|<br>-0.1|13.5|-12.2|2|0|
|Sub-Saharan Africa|238|12,100|2.9|<br>7.9|0.2|0.4|97|1|
|North Africa|1,480|14,676|17.9|<br>-8.2|1.3|6.9|97|-25|
|West Asia|4,939|45,973|56.7|<br>-21.3|11.1|3.8|92|-8|
|ASEAN|278|8,559|2.2|<br>3.0|2.9|3.0|65|1|
|Other Asia and China|8|3,330|--|1.8|0.2|2.6|23|36|
|Developing Oceania|--|--|--|--|--|--|0|2|

a The composition of the developing country groups is as follows: ALADI - Argentina, Brazil, Chile, Mexico, Paraguay, Uruguay.

Andean Group - Bolivia, Colombia, Ecuador, Peru, Venezuela. CARICOM - Bahamas. Barbados, Belize, Guyana, Jamaica, Trinidad and Tobago. Other America - Antigua, Dominica, Grenada, Saint Lucia, Saint Vincent, Bermu.da, Cuba, Dominica, Falktand Islands, French Guiana, Greenland, Guadaloupe, Haiti, Martinique, Antigua, Panama, Surinam.

Sub-Saharan Africa - All countries in Africa except Rep. of South Africa and those listed in North Africa (below). North Africa - Algeria, Egypt, Libya, Morocco, Sudan, Tunisia.

ASEAN - Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand.

Other Asia and China - Bangladesh, India, Rep. of Korea, Laos, Sri Lanka, Afghanistan, Burma, Democratic Kampuchea, Hong Kong Macau, Maldives, Nepal, Pakistan, China.

West Asia - All Asian developing countries not in ASEAN or other Asia and China. Developing Oceania - American Samoa, Fiji, French Polynesia, Guam, Kiribati, New Caledonia, Papua New Guinea, Samoa, Sotomon Islands, Tonga, Vanatu.
17 by its Spanish acronym ALADI, Andean Group, CARICOM, etc.) in 1965 and 1987 **as** well as the share of this exchange that was in primary and processed stages. To indicate how **the** competitive position of the developing countries changed, the table also shows their 1965 trade share as well as the change that occurred over 1965-1987.

In the agricultural materials group, and to a slightly lesser extent in ores and metals, the table shows that a fairly massive shift occurred in almost all the developing country groups toward processed exports even though different "baskets" of goods may be traded. Both ALADI and the Andean Group, for example, exported approximately 90 percent of their agricultural commodities in unprocessed (stage one) fo;m in 1965, but the share of these items in 1987 had declined by more than 70-percentage points.13 West Asian countries exported 97 percent of all agricultural materials in raw form in 1965, by due to a major trade expansion for cotton yarn and cloth, rubber manufactures and leather goods-accompanied by an absolute decline in primary stage exports of the cotton, rubber and leather processing chains--the share of unprocessed commodities fell to about one quarter of total exports. Developing Oceania is the only group where unprocessed agricultural materials actually increased in relative importance due entirely to development of natural rubber exports (a newly traded good) over the 1965-87 period.

> 13 The dramatic decline in ALADI's primary product ratio is to a large degree due to a shift from primary to processed leather products. Leather footwear was particularly important as exports changed from about US$1 million in 1965 to over US$1.3 billicn in 1987--primarily due to Brazil. The paper and cotton chains were largely responsible for the Andean Group's declining primary product ratio. In 1987 exports of bulk cotton (US$76 million) were almost double that of raw cotton, although the latter was only exported by the Andean Group in 1965.
18

**Ta )le 4 shows that the structure of food exports was more stable, although the share of unprocessed foods declined by 10 points or more for the West and Other Asian groups. In both cases this shift was almost ...tirely due to further** processing of products in the fruit, vegetable and fish chains. **Conversely, fruits and vegetables were largely responsible for the relative increase in primary foodstuffs exported by the "other America" group as these countries became increasingly important suppliers of fresh winter produce to the North American market.**

**In spite of the re!versals for petroleum, the picture that emerges from Table 4 (and Table 3) is one of a general broad-based shift** in the structure of most developing countries' com,modity exports toward processed products-particularly in the agricultuLal materials and the ores, minerals and metals groups.14 A key question is how this shift may have influenced the stability and trend in developing countries' export prices.

> 1 4 While an in-deoth evaluation of factors responsible for the increase in crocessed cormmor.dities' relative ..- ncrtan:.e is beyor.d the present study's scope, it is possible to identify several in,portant cont.r tining factors. First,-a series of o<ultilateral trace negotia: :ns nas greati v reduced the level. anrd d,gree cf eszalatic.. -n d. -cloned oonrzes narLffs. se- Ea.la.sa (1968, :ables , f-'sa-, **_C._** - h _ - ,-t.l:._' ' _i:-. **:'c** t. **n: e** -,ia:-er n_tenedy ?-_nf.I Sec=-d, it ai.ears than dewen : .-:u.rces ovo domtoc policies ma' We at .as o; e-qa ,rtance n slu zrce-zselng of as exteiinal constraints in expcrt r-arkeps. C-_ -.tres - .e ^_t::a-d-or enrted" grcn-h strategies, 1loe Hc-.g K-ng, Fep ,-rof Ko.rea, Si:-a-re an' 2ai"ran (China), greatly -ncreased -heir exccr-s cf rc:eosedl ce e.en ,',-,en the primary stage iterm, had tc be forso irmnocrted. Thrrd, *he was also the result cf somne d .el prcng cunnr emr romti.,g i o _L esos_ toha-u s_curaged onprccessed exports. These include q_otas on some primary ov. dit\ exports tsuch as limits Brazil rlaced on hides and skins shipments) or sp:__al export taxes. Political and ecnc,mic stability we-re a ccntrLb.ting factcr in scme courntries as this attracted ie n r.vestment. Capital requirements can be a rm,ajor constraint to the expansion of developing cuuntry ccmmodity processing Farticularly in the ores, minerals and metals group.
19

# IV. Price Formation for Primary and<sup>Processed Commodities</sup>

Table 5 summarizes results when<sup>the measures of price change and</sup> instability (see equations 1 and 2) were<sup>computed for the primary and final</sup> stages of each commodity processing chain. In addition, average results for the three major commodity groups--foodstuffs,<sup>agricultural materials, ore and</sup> metals--have also been derived using actual<sup>trade weights for the individual</sup> chains. Using plus and minus symbols the table<sup>has been coded to quickly</sup> indicate where further commodity processing<sup>leads to greater (+) price stability</sup> and long-term increases while a negative<sup>(-)</sup> symbol indicates prices have fluctuated less (or risen more) for<sup>the primary stage item.</sup> In terms of both stability and long-term<sup>price increases, Table 5 shows</sup> that the major gains from further<sup>processing cccurred in the ores, minerals and</sup> metals group. On average, the primary stage commodities<sup>in this group</sup> experienced annual fluctuations of<sup>23 percent as opposed to 13 percent for the</sup> processed components. The most extreme<sup>primary stage annual price fluctuations-</sup> -33 and 39 percent respectively--were<sup>fot copper and tin where changes of 80</sup> (copper) to 0 (tin) percent occurred after the 1973<sup>oil price shock.</sup> In addition to greater stability, Table 5<sup>also shows that processed ores and metals</sup> experienced a considerably more favorable<sup>long-term increase as the average price</sup> rise for these items (246 percent) was<sup>almost 70 points higher than that for the</sup> primary stage components of the chain.<sup>15</sup> 15A crude measure of the export earnings gain due to higher prices for processed commodities can be derived by<sup>deflating the overall value increase for</sup> these items by the 1965-87 difference<sup>in the change in primary and processed</sup> commodity prices. These higher pL.ices<sup>raised developing countries' gross export</sup> earnings for both agricultural raw materials<sup>and ores and metals by more than</sup> US$6,200 million.
_ < s z r _ :c U X r _2_ t _.n_ f ___ S _'1:1 .= ~~*_ ._ . ***I** >, 4. C C " 0 **4-** 0 -- ~ ~~~~ ~ ~ l ~ 0400 01.- **_.4_** 4 .- mN. -- ssgg| **0** l8j°_cor ^°~

>, z'

* ~ 0 0 -x., ^V2 + + + | + + + + .+ 00 0.4 0

2~~~~~~~;

-

>

**,4** o **4**

.. ~~~~~ .. . .

- .. ...

-. .2-0C.. . *J,... 0.2 **22.S7. tnOO**
**Table** S ANALYSIS OF INSTABIlITY AND lO(NG TFRM CHANIGFS IN PRIMARY AND PROCESSED<sup>CO4IMODiTYPRICFS,</sup> 1965 1987 (Cont d)

||**A**<br>1l|i<br>**h**|**_--_**<br>**_easrre,_**<br>_of_<br>Acnira-|**PriLes**<br>Stabilxy<br>Cof JS|ierir<br>**_of_**||Secul-<br>r<br>pic-e|<br>ch..&.'|**Trend**|
|---|---|---|---|---|---|---|---|---|---|
|Proc-ssing<br>Chaln|**verage**<br>a--a<br>1965<br>to<br>_1_<br>Primry<br>**stage**|pr-ce<br>**canges**<br>_98l_<br>_(%)_<br>**Fia1**<br>**st-R.e**|Stability<br>(il<br>o<br>**less**<br>(|<br>**detecmirr.**<br>Puirsry<br>**sta-g**|<br> <br>**JRore**<br>**rion**<br>**(i**<br>**2**<br>**)**<br>**Final**<br>**s-8g**|5t-biliy<br>-rnre<br>i)<br>**or**<br>**1e-.**<br>(|<br> <br> <br>1965 68**Io**<br>1<br>PrIma,<br>**-sragr**|<br> <br>985-8r<br>(1)<br>**Finl1**<br>**st.ge**<br>.|**gc-sth-re**<br>(01<br>or<br>1-s.|
|**Trmgsten**|24<br>|iS<br>||-<br>04<br>|0 44<br>||_32?_<br>|_64_<br>||
|Coppe-|33|13<br>|*|009<br>|0 64<br>|*<br>|92<br>|96<br>||
|**Pi-spha-e**|Is|1. -||II 52<br>|Ii 91<br>|r|!98<br>|619<br>||
|S lph,r|In|IS<br>|r|I)18<br>|082<br>|**r**|**42'**<br>|223<br>||
|**Asb-,-rrs**|9<br>|11<br>||1 10<br>|0 lb<br>|.|156<br>|228<br>||
|(<br>**..ss**|14|15||( 61|O3 1||133|09||
|IV<br>PETROLEUM|21|_20_||ao<br>80|50||_828_|168||

**The** prte -nstability **and pci,e -rge m relate -easure** - t1-o te fi rd **I-a, tages** ci **Ite pr Irg stage** i **r p-1tcessii *t-ges otl ned** i-, Appeid I Table I **Stliar data** cor ltrretrsedl **are stag,s (taiete** they exist,/ **are ava** lIable from 1ire sitho tori 1es

6 **The averages** shodt- r i a- beeco- tp rtr-t isin I ievelnph rg r- rtr ry **t rade** I f Itght s i tir- -h1, -vt'1 or- nodities i }e grrp
22 Similar conclusions about more favorable prices for processed commodities occur for the agricultural material. group. Annual price changes for the primary stage items were 60 percent greater (16 as opposed to 10 percent) than that for the processed stages with the instability in raw cotton prices being almost two and one-half times that for cotton fabrics. In the two instances (pulpwood and flax) where annual price changes for the primary stage item were lower, the coefficient of determination (R<sup>2</sup> ) for the trend line fitted to the processed stage item was distinctly higher. This implies that the latter's prices were in fact more predictable although their annual changes were larger. As was the case with the ores and metals group, the secular change in processed agricultural materials prices was more favorable--the 1965-87 increase for these ttems was 15 percent above the corresponding change for primary stage agricultural materials.

The observed relation between further processing and more stable international prices also holds for the food group overall, but the statistical results for individual chains show far less consistency. The processed stage food products experienced annual price fluctuations that were 2 points lower (15 versus 17 percent) than that for unprocessed foods with this overall result largely being influenced by coffee which has a relatively high weight in the group average. In a majority of the chains (11 of 19) processed foods had greater price stability with an even higher proportion (14 of 19) occurring when the coefficient of determination is used as the relevant measure. Primarily due to the absolute decline in tea extract prices, as well as the 646 percent increase for fresh shellfish, unprocessed food commodity prices rose more than 22 percent above those for the processed products in these chains. A rapid expansion of seasonal (winter) fresh food exports, which command a price premium,
23 from developing countries also helps<sup>explain why the overall trend in processed</sup> food prices was less favorable.<sup>1 6</sup>

# V. Summary and Conlclusion

Two object.ves of irteinaticnal commodity policy have been to Leduce instability in exporter's earnings and<sup>importer's prices through international</sup> (buffer stock) agreements and to encourage<sup>further processing</sup> of domestically produced commodities by develop~ing countries. However, it appears that little attention has been given to potential interrelations<sup>between these objectives.</sup> Specifically, if processed commodities are traded in markets<sup>that are ger.ally</sup> more stable, and if these items experience<sup>more favorable</sup> longer-term price trends, this would be a further previously unrecognized attraction of natural resource-based industrialization strategies. Also, if a significant number of developing countries are shifting their<sup>composition of exports toward processei</sup> commodities, and if the markets for<sup>these items are in fact less unstable, this</sup> could alter the prLcrity attached to negotiating commodity price stabilization agreements.

Using the Wor'd Bank's commodity processing classification scheme this study shows that a major structural shift<sup>occurred from the mid-1960s to late</sup> 1For all nonpetroleum products reported in Table 5 the average annual primary stage price change was 18 percent,<sup>or5points higher than the processed</sup> products. Due to the relatively high weight of foods,<sup>the secular price change</sup> for primary stage products (198 percent) was 3 points higher than<sup>that for</sup> processed goods.

> 17 Alternatively, if a shift to exports of processed commodities leaves a diminishing and relatively small number of developing countries reliant on exports of primary (unprocessed) commodities it may be more attractive to work for export earnings stabilization measures<sup>(like the European Community's STPSEX</sup> program) rather than standard commodity agreements or Common Financial Fund operations.
24 1980s in the composition of developing countries'<sup>exports toward most processed</sup> commodities and this change was reflected to varying<sup>degrees</sup> in all major developed country import markets. However, the developing countries actually responsible fcr the further processing (such as the Asian NICs) often were not major producers of the primary (unprocessed) commodity. This finding suggests that internal constraints to commodity processing may often be more<sup>important</sup> than external barriers like escalating tariffs.<sup>This study also established that</sup> the shift resulted in developing countries receiving considerably more stable agricultural materials and ores and metals export<sup>prices--and to a lesser extent</sup> prices for foodstuffs--as well as more favorable long-term<sup>price changes.</sup> Both factors should further enhance efforts by developing countries<sup>to encourage local</sup> processing of domestically produced primary commodities.