Issues Pertaining to Single Commodity Exporters

Issues Pertaining to Single Commodity Exporters

by

Mehmet Arda and Olle Östensson, Commodities Branch, DITC, UNCTAD

1. Who are the single commodity exporters?

For the purposes of the discussion in the present paper, the single commodity exporters (SCEs) are defined as those developing countries that depend on a very small number of commodities for a large portion of their total agricultural export income. Based on a quick statistical review of agricultural exports at the 3-digit SITC level in 1998, a total of 32 countries depended on one commodity for more than half of their agricultural export earnings (the statistical analysis will be extended later). If the number of commodities is increased to two (since it is assumed that the term “single commodity exporters” should not be interpreted too restrictively), the number of countries increases slightly to 38.¹ Assuming that the countries of interest are likely to be those that also depend to a significant extent on agricultural exports, an additional somewhat arbitrary threshold of more than 30 per cent of total merchandise export revenues from agricultural commodities was introduced. 22 countries also meet this criterion (see the annex for a list of the countries concerned)².

The agricultural exports of the 22 countries that meet the two criteria are concentrated in three commodity groups: tropical beverages (with coffee exports being important for nine countries, cocoa for two and tea for one), cotton (seven countries) and fruits and vegetables (six countries). Other commodities of importance, although to fewer countries, include oilseeds, spices, and sugar.

The SCEs fall into two categories. Countries in the first category (seven of the 22, although the exact number of countries in either category could be discussed), which could be termed “perpetual” SCEs, cannot, because of small area and/or population and climatic factors, expect to change the situation in agricultural production and exports. They can (in theory) only expect vertical diversification, if the products that they produce are suitable in this respect, or shift out of agriculture into other activities. The other category, which could be called “transitory” SCEs, mainly consist of larger countries, which can expect to diversify into alternative areas of agricultural production, benefiting from the opportunities that may be offered by the international trading system. The reason for distinguishing between the two categories is that they have different needs and that their approaches to the agricultural negotiations may differ.

2. Characteristics of the SCEs

Agriculture is the mainstay of most SCEs’ economies and provides the livelihood for a major part of their population. It constitutes the basis for the development and structural transformation of these economies, including their industrialization. It carries the burden for the generation of savings and foreign exchange necessary for this process, and has this potential if the retained value added from the production and exporting of commodities can be increased and efficiently utilized.

2.1 Reasons behind being a SCE

Some reasons such as smallness and climatic factors cannot be changed through policies and measures. For these countries, the important thing is to improve the performance of the single commodity(ies) so that the export earnings and retained value added are increased and as many as possible of the negative aspects (e.g. revenue fluctuations) are dealt with.

There are many other reasons that cause a country to be a SCE. These should be targeted by national and international action. Regarding their relationship with WTO, some fall squarely into the negotiations, some (for example, some areas for negotiation and trade related technical assistance) appear to be potential WTO issues, some others are irrelevant for the WTO. They are respectively and tentatively indicated as WTO, possible WTO and non-WTO.

• Economic and institutional entry barriers (these are mostly, but not only, relevant for new products).

o Market access, particularly for new products – market access for SCs may also be important and in such cases they should be improved. But the fact that these products have become SCs indicates that these barriers have not been the determinant factor for export problems. Barriers for the more processed forms are likely to have been the main problem (WTO).

o Subsidies and support in industrialized countries that put the potential exporters at a competitive disadvantage (WTO).

o Oligopolistic market structures, with significant entry barriers especially at points of high value added, including but not confined to, more processed forms of the product in question (possible WTO).

o Insufficient market information (prices, markets, quality requirements) to allow entrepreneurs to make informed decisions (non-WTO).

o Access to technology and inputs. Technological improvements and access to high quality inputs are needed in order to produce and process new products as well as to upgrade the SCs and export them in processed forms (possible WTO, technical assistance).

o Quality assurance and control, also related to storage, especially refrigeration, particularly for high value products such as fresh fruit and vegetables (possible WTO, technical assistance).

o Difficulties with access to finance, both domestic and international (non-WTO).

o Lack of advice and extension services – cost cutting related to structural adjustment programmes and indebtedness has increased the importance of these problems (possible WTO, technical assistance).

o Limited domestic (and regional) markets – diversification often starts from home or close to home (possible WTO - RTAs)

o Inappropriate legal basis for finance, risk management, contracts and contract farming (non-WTO)

o Small size, lack of organization and cooperation among domestic firms (non-WTO)

o Insufficient government support to investors, domestic and foreign, including both absence of appropriate institutional frameworks and lack of resources (possible WTO).

• Economic and institutional exit barriers preventing diversification

o Considerable sunk costs in current activities, for instance, trees with long gestation periods may have been planted (non-WTO)

o Skills have accumulated in producing the SC, and consequently there is a lack of skills in producing and marketing alternative products (possible WTO, technical assistance)

o Historically established international marketing and transport linkages for SCs (non-WTO)

o SC production is often dominated by small producers, and diversification into other products entails risks that these producers cannot assume.

• Social and political factors perpetuating SCE characteristics

o Political institutions are under the influence of the dominant sector (non-WTO)

o It is easier as well as politically and socially more attractive to support the dominant sector (non-WTO)

o Financial and technical assistance is directed towards the SC sector

• Macroeconomic factors reinforcing SCE characteristics (mostly non-WTO)

o Debt burden and devaluations favour increasing the production and exports of the traditional product because it is easier to do so in the short to medium term.

o Incorrect and static interpretation of comparative advantage: Successful participation in international trade calls for specialization in products for which a country has comparative advantage. In this respect, diversification may appear to be an idea that contradicts this basic principle. Comparative advantage, however, is an evolving concept and diversification is a dynamic process. Through the elimination of certain bottlenecks and the adoption of appropriate strategies both at the governmental and entrepreneurial levels, the competitiveness of firms may be enhanced and hitherto unrealized areas of comparative advantage can be spotted. Specializing in these products while seeking to graduate to those that generate higher degrees of retained value added is the essence of a successful diversification process. The international trading system should contribute in this respect.

o Oligopolistic markets leading to increasing gaps between international prices and consumer prices, and to the benefits of productivity improvements being appropriated largely by intermediaries and/or consumers. This reduces the attractiveness of diversification.

o Lagged and imperfect response to price changes

o Insufficient infrastructure, particularly as regards both costs and availability of transportation (especially important for some countries, and for some products that have high potential in world markets – e.g.fresh fruit and vegetables)

2.2 Effects of, and problems associated with, being a SCE

The SCEs are almost invariably stuck in products with slow growth and negative price trends. They therefore lack revenues and resources for development and diversification and remain SCEs. It should be noted that there may be newcomers producing these products but they are normally not SCEs and have diversified into these products as an economic choice. The development of prices for products exported by SCEs has generally been worse than for those exported by industrialized countries. Moreover, SCEs experience large fluctuations in export earnings, normally for reasons outside the control of the SCEs themselves, which lead to macro and micro instability, higher risk premiums, reduced generation of savings and consequently less resources for development. In the case of the poorest SCEs, the vicious circle of dependence on one or two commodities with weak price and demand trends leading to reduced resources for development and continued lack of diversification reinforces the “poverty trap”.

In SCEs, entrepreneurs who are active in the agriculture sector are stuck in dealing with the SC. It is the enterprise sector that should be the operative actor in the diversification process. The strategy should not aim to "pick winners" but to generate the conditions whereby potential winners will identify and exploit opportunities. However, in SCEs these conditions are difficult to create for the reasons outlined above.

3. A framework for possible proposals

Diversification should not be construed as an attempt to produce, and export, a diversified set of products and services at any cost. It should aim to break the vicious circle of dependence on a small number of low value commodities often produced inefficiently and exported in unprocessed forms to a few markets. This would also reduce the vulnerability of economies to external shocks generated by the wide fluctuations often encountered in world commodity markets. It calls for improved competitiveness and supply capacities, and entails adding value to raw materials through industrialization and further processing (both for domestic and international markets), better positioning in global product chains, increased participation in marketing and distribution networks, as well as the possibility of producing and exporting higher valued commodities. With improved competitiveness, even the contribution of traditional low value commodities to development can be substantially increased.

Looking at the “reasons” part in section 2.1 above, it may appear that the SCEs’ demands would follow those made by developing countries in general. However, the particular concerns of the SCEs could be couched in terms of the importance that the particular commodity carries for their development, both as a source of revenue and as a source of savings necessary to get them out of the SCE status. This is also the reason for differentiating between the “perpetual” SCEs and “transitory” SCEs. It may be easier to argue for “temporary” S&D for the latter. As a matter of strict logic, the former would need “permanent” S&D.

Possible requests could be considered to fall into four groups: (a) domestic diversification policies by the SCEs, (b) favourable market access for the SC, (c) favourable market access for products (and related lines of activity such as marketing) into which the SCE intends to diversify, and (d) technical cooperation and technology transfer with a view to dealing with supply constraints.

For (a), there is some leeway in the UR agreements anyway. However, tariff protection may be demanded for the products into which the SCE intends to diversify. One problem with this is that the SCE would not want to be locked into a situation that it (in fact, its enterprises) finds to be no more desirable. So, a proposal may be to have freedom within a certain limit (e.g. the number of items, not necessarily all export oriented, that are reasonable candidates for diversification) to impose import restrictions for a certain time.

Notwithstanding the ideal of free market access for all products all the time, it may be argued that (b) for the “transitory” SCEs would be temporary to allow them a reasonable amount of time to diversify. In fact, for such access to be a positive factor in the development process, it needs to be temporary, since otherwise it will contribute to perpetuating the situation. For the “perpetual” SCEs, free market access would in principle have to be permanent.

The group (c) would be a relevant proposal for the “transitory” SCEs, and it should also have limits on coverage and time.

Under (d), many technical cooperation proposals can be formulated. These would ideally be focused on problems related to the SCE status. Regarding technology transfer, some limitations in terms of the sectors into which the (enterprise sector of the) “transitory” SCE intends to diversify would be more reasonable than a blanket proposal for technology transfer that concerns all developing countries. While for “perpetual” SCEs special technical assistance and technology transfer to the SC sector may be justified, for the “transitory” SCEs it would seem more reasonable and politically acceptable to focus on new sectors.

Annex

Countries with more than 50 per cent of agricultural export earnings from one or two commodities and with agricultural exports accounting for more than 30 per cent of total export earnings in 1998

Country Commodity Per cent of agricultural exports

“Perpetual” SCEs

Comoros Spices 100

Dominica Fruits 85

Vegetables 9

Gambia Oilseeds 67

Vegetables 9

Grenada Spices 48

St Kitts-Nevis Sugar 94

St. Lucia Fruits 85

Alcoholic beverages 12

St. Vincent and the Gren. Fruits 52

Wheat meal or flour 16

“Transitory” SCEs

Benin Cotton 83

Oilseeds 7

Burundi Coffee 97

Tea 2

Central African Republic Cotton 76

Wood 13

Colombia Coffee 51

Cote d’Ivoire Cocoa 53

Coffee 13

El Salvador Coffee 55

Sugar and honey 13

Ethiopia Coffee 75

Ghana Cocoa 67

Wood 13

Honduras Coffee 55

Fruits 21

Mali Cotton 94

Live animals 3

Paraguay Oilseeds 51

Cotton 9

Togo Cotton 66

Coffee 12

Turkmenistan Cotton 87

Silk 4

Uganda Coffee 63

Zimbabwe Tobacco 47

Cotton 12

¹ If fish exports were to be included, the numbers would rise to 38 and 48 respectively.

² It should be noted that this limit is arbitrary and that it excludes some countries (such as, for instance, Guinea) which arguably should be able to benefit from any special and differentiated treatment.