Month: December 2008

High Commodity Prices: Implications and way out for developing countries like Uganda

This paper evaluates the impact of high commodity prices due to trade liberalisation for developing countries in Africa. Implications of high commodity prices (i.e. macroeconomic instability and loss of state power, unemployment, and poverty and food crisis) are explored focusing mostly on the agricultural sector. Recommendations on how governments may reduce impacts of trade liberalisation and contribute to national stability are provided.

Globalisation represents a geographical reformulation of the progressive universalization of capitalist commodification and accumulation. Commodification is the transformation of common goods and services (or things that may not normally be regarded as goods or services such as basic resources like water or products such as crude oil, coal, salt, sugar, coffee beans, soybeans and wheat, gold and silver) into a commodity. One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. The price of the commodity is subject to supply and demand. For example, a farmer risks the cost of producing a product ready for market at some time in the future as he doesn’t know what the selling price will be. The commodified nature of life has meant that the relative positions of the wealthy and the impoverished have come more pronounced in terms of who has the means to purchase the services on offer. This has especially become problematic with the emergence of new security markets throughout the world, and the situation is exacerbated when these security markets begin to infiltrate weak, failing and transitional states.

Commodity price volatility problems are well documented. These include high revenues that tend to distort fiscal responsibility and monetary policy and encourage rampant corruption. A fall in prices can also lead to a reduction in government and producer revenues, including unemployment and a decline in government spending on education, health and other basic amenities. While developed country producers are supported by subsidies and social safety nets, developing countries and smallholder producers (like Uganda) feel the effects of commodity price volatility much more directly. In the early stages of a countries development, policymakers exploit agriculture through export taxes and overvalued exchange rates. In contrast, agricultural policy in advanced industrial countries has strongly protected domestic producers by means of trade restrictions, direct price or income supports, and public investment. A recently released joint Action Aid – South Centre report entitled “Commodity Dependence and Development: Suggestions to tackle the commodities problem” also explains how dependence on a few primary products seals and perpetuates poverty. It draws attention to three features of commodity markets that will keep those that are dependent on commodities poor forever. These include the unpredictability of international prices; the belief that over the long term, prices of primary commodities go down (in relation to prices of finished goods or goods to which value has been added); and there is a tendency towards concentration of production in just a few hands, internationally.

The price of commodities produced in Uganda, especially food crops, is also connected to increased fuel prices. With increased fuel prices, transportation costs for goods have gone up with urban dwellers feeling the effects of the increased prices more than rural people. For imported commodities, the increase affects everyone. Fuel prices have gone up, with a litre of petrol costing USh3,000 (US$1.50), up from Sh2,800 ($1.40) while a litre of diesel now goes for Sh2,800 from Sh2,600 ($1.30). With the fuel shortage beginning to take effect, commodity and transport charges have gone up across the region. The recent discovery of oil reserves in the country may not alleviate the situation since the Ugandan President announced progressive co-operation and granted explorative rights for many international countries and multinationals, which may not decrease local fuel costs and commodity prices.

Implications for high commodity prices in Africa
Macroeconomic instability and loss of state power
Commodity price volatilities lead to macroeconomic instability, which is detrimental to economic development. There is now macroeconomic instability all over Africa. One of the biggest offences of the neo-liberal paradigm was to advise African countries to do away with their state marketing boards, with market power transferred to private hands of a few. This has resulted in market concentration. In countries where these marketing boards have now been abolished in the names of structural adjustment, liberalisation and fair trade, we are seeing a worrying picture. Producers are weak and have been left without state protection and are defenceless in international markets, which favour the strong. Countries like Senegal which liberalised their groundnuts sector are facing a crisis of overdependence on a narrow band of commodities. Many Asian countries managed to avoid the crisis currently facing African agriculturalists because they did not fall into the debt and structural adjustment trap, and because the state refused to withdraw from taking the lead in development. The situation is much different in West Africa where states have not taken the lead in development. West Africa accounts for two-thirds of the world’s cocoa production. Until the 1980’s the region’s cocoa was produced and marketed under state control, but in the mid-1980’s and 1990’s several West African cocoa-producing countries (i.e. Cameroon, Ghana, Nigeria and Cote d’Ivoire) began reforming their cocoa marketing and pricing systems. The rapid reforms have weakened functions that were the responsibilities of the state.

Unemployment and poverty
In Africa, agriculture remains an important sector for unemployment. The commodification of the agricultural sector can impact negatively on a country’s development and increase poverty. The latter has in fact been the result of the last twenty years of structural adjustment policies in many African countries. From being net food exporters in the 1970s, the liberalisation policies of the 1980s and 1990s led to only small increases in the growth of exports, but exponential growth in terms of Africa’s imports of food products. Whilst 72 percent of the population in Sub-Saharan Africa or 286 million were living under $2 a day in 1981, the figure is 72.2 percent in 2007, or 551 million. Lower tariffs essentially led to an overflow of food imports, with, for example, subsidised tomato paste from Italy destroying Ghana and Senegal tomato producers. Not only are the imports increasing unemployment, the poor developing countries’ food import bills are also escalating. The deficit in 2001 of US$11 billion is predicted to rise to US$50 billion by 2030. If food prices remain high, this figure could easily be doubled. The key notable effect of liberalisation in Uganda since 1987 has been the collapse of the cooperative movement and system which has affected productivity and contributed to worsening rural poverty. Although gains have been achieved in the areas of economic growth and stability as well as government revenue, it is clear that liberalisation of the economy has achieved marginally in terms of the international competitiveness of domestic production especially in agriculture. The poor households have also not benefited in terms of income growth and better prices. Rapid liberalisation has greatly increased the overall exposure of the economy to global markets. Consequently, the vulnerability of the poor households, particularly farming households has greatly increased.

Policies promoted by the World Bank, IMF, and WTO systematically discouraged food self-sufficiency and encouraged food importation by destroying the local productive base of smallholder agriculture. Hunger and famine have become widespread with the last three years alone seeing food emergencies break out in Africa. Agriculture is in deep crisis with one of the major explanation being the phasing out of government controls and support mechanisms under the structural adjustment programmes to which most African countries were subjected as the price for getting IMF and World Bank assistance to service their external debt. Instead of triggering a virtuous spiral of growth and prosperity, structural adjustment saddled Africa with low investment, increased unemployment, reduced social spending, reduced consumption, and low output, all combining to create a vicious cycle of stagnation and decline. A disastrous free market neo-liberal restructuring of agricultural land promoted by supranational institutions has created a global crisis in food production through import liberalization, elimination of tariffs, a dependency on cash crops, GMO seeds and fertilizers, and all other measures that work in favour of agribusiness and against the millions of small-scale farmers struggling against poverty and hunger. World commodity prices have risen strongly in the last few years, driven primarily by the surge in oil prices to record highs. The UN’s Food and Agriculture Organisation has recently warned that surging prices for basic food imports such as wheat, corn and milk had the “potential for social tension, leading to social reactions and eventually even political problems.

Ugandan food crisis
Currently, Ugandan urban citizens grapple with soaring commodity prices, with analysts predicting that the urban poor will be even under greater strain if regional markets remain competitive. The prices of most food items, including those locally produced, have more than doubled since the start of 2008, raising fears that the country could be headed for a food crisis. Bananas, potatoes, beans, beef and vegetables are exported to foreign markets in South Sudan, eastern DRC and Rwanda, where growing (and competitive) markets must be satisfied. About 15 per cent of Uganda’s 30 million people lives in urban areas, where the soaring prices are most upsetting. The effect of world prices is the major cause of high commodity prices. A 2001 study by the Britain’s University of Nottingham by the Centre for Research in Economic Development and International Trade showed that if the policy of trade liberalisation was carried out in developing countries like Uganda without adequate checks, international trade could affect prices of commodities in Uganda 10-fold. Food prices are likely to increase more than export crop prices Uganda’s export earnings soared 40 percent last year on higher prices for most of the country’s main commodities.

Effects on Uganda’s coffee earnings
High commodity prices have also impacted on Uganda’s coffee earnings. Uganda is a leading African and international coffee producer and exporter. It is Africa’s second largest producer of coffee after Ethiopia and the 7th largest coffee producer in the world. The Ugandan coffee sector is renowned for the high quality of its Robusta. The sector has a large geographic and socio-economic footprint. In the 25 years to 2005 coffee contributed an average of US$ 245 million a year to Uganda’s export earnings. Over the last 5 years, Coffee earnings have accounted for just less than 20% of export earnings. Unfortunately, a decline in world prices of most of Uganda’s traditional exports (coffee, cotton, tea and tobacco) have contributed to a fall in export earnings despite an upward trend in the share of non-traditional exports resulting from diversification efforts. Overall, agriculture still accounts for the bulk of Uganda’s exports contributing over 70% of the value of the total merchandise exports.

Secure national food production and food sovereignty
There must be an explicit recognition of the basic right to sustain food production and promote food sovereignty in developing countries. There is a need for re-nationalisation of agricultural produce and the end to trade-distorting subsidies in developed countries. For the poorest and for the commodity-dependent nations at the moment this will also entail national policies and international cooperation to foster agricultural production and productivity. Until the re-nationalisation of common goods, the alternative trade networks in organic and fair trade and the opportunities for strengthening the brand of Ugandan products can offer farmers an opportunity for price premiums. This will in turn help producer’s withstand declines in international prices. Further efforts should also be put into both ensuring that the Ugandan Robusta coffee brand continues to lead in both quality and price and that the country increases its output of organic and fair trade products to match the global average. Uganda’s Robusta coffee already enjoys a strong reputation built on higher quality beans, ensuring that it earns a premium price. There is a need for Uganda to implement agricultural policies that provide incentives to local farmers and facilitate increased production so that an increase in world prices need not disadvantage Uganda because the country has the potential to displace more expensive imports with increased domestic production.

Finally, to reduce the impact of high commodity prices due to an increase in fuel prices, the Ugandan government needs to ensure that benefits of its oil reserves are secured for citizens through nationalisation. For example, Venezuela is among a small but growing number of resource-rich countries to put the squeeze on international corporations from extracting resources from the country that do not benefit locals. To the resource-rich developing states involved in such moves, it is an important signal of sovereignty in an age of globalisation where the state is losing power. National interest must also direct popular governments to take shelter behind democratic pressure and act in a manner which sacrifices the WTO rules on globalisation (which disadvantages citizens with high commodity prices). History provides us ample examples when nations abandoned free trade and embraced protectionist policies to further their interests and stay in power.

Leonard, L. (2008) High commodity prices: Implications for developing countries like Uganda, Ugandan Parliamentary briefing, Royal African Society, United Kingdom, 3 December.