Agricultural commodity prices have fallen by
30 percent since a peak in 1995, according to the International
Monetary Fund (IMF). Coffee and cocoa prices are at their lowest
levels in 30 years, and cotton prices have sunk to a 17-year
low. This all spells trouble for developing countries dependent
on both agricultural exports and imported processed goods to
feed their growing populations. The downward trend was the
subject of a recent consultation at FAO headquarters in Rome.
The meeting brought together representatives of the World Bank,
the IMF and international commodity organizations. Among the
speakers was Robert Mundell, a Nobel economics laureate and
professor of economics at Columbia University in the United
States. Professor Mundell shares some of his views on the
commodity prices so low?
we first have to be specific when we talk about commodity
prices. How are the prices measured? A price is a ratio of two
things -- the commodity itself, say a pound of coffee, and what
is paid for it. It makes a lot of difference whether the
commodity is being paid for with another commodity or a basket
of commodities or money. And if it is money, which currency is
it? A lot of trouble and confusion arises because the unit of
measurement is not clear.
If prices are
measured in currency, they could rise or fall just because of
inflation or deflation. We might worry about the stability of
money, but we need not be concerned about commodity prices going
down or up because other prices (including wages etc.) would be
moving the same way.
But since the
breakdown of the international monetary system in the early
1970s, there have been fluctuating exchange rates and so that
can lead to a bias in our measurement of commodity prices. It
makes a difference if you're talking about commodity prices
in dollars or yen or some other currency. So is there really a
major commodity problem? There is a problem insofar as the
dollar price of commodities has gone down. But the major cause
of that has been the strong dollar. That's a large part of
the reason because the dollar is a very special animal.
How is the dollar
The US economy is 25
percent of world output -- more with current exchange rates.
Until the euro came into being, the US dollar was always the
only default international currency, and that has had a very
special effect on the way the world economy works. Look at the
dollar cycle. Since the 1970s, when the international monetary
system broke away from fixed exchange rates, a strong dollar has
meant weak commodity prices. The dollar cycle does not
necessarily cause the commodity cycle. But perhaps the same
factors that caused the dollar cycle caused the commodity cycle.
One of these factors was a rise in productivity because of new
technologies and the Internet economy.
So how would you rather see commodity prices
measured, if not in dollars?
wouldn't scare people so much if they were measured in a
basket of the major currencies, a combination of the dollar, the
euro and the yen. This would result in a weighted average of
interest rates or other variables of those currencies to provide
a kind of 'benchmark' value against which other
currencies could be weighted. I've recommended to FAO that
they ask the IMF to give commodity price indices in Special
Drawing Rights, the IMF's unit of account, and in euros as
well as US dollars. Then you'll see that the fluctuations
are still there, but they are not nearly as great as they appear
to be now.
What does this mean
for countries dependent on one commodity for their export
A typical small
developing country cannot control the prices that can be earned
in that product in dollars or in euros or in other important
currencies. This means that when commodity prices fluctuate a
lot in dollar terms, the country's income goes up or down,
and it can be very disturbing to have this volatilityin prices.
For that reason many countries would like to expand and widen
their product range. It would be a very good idea to develop an
African Monetary Fund, which would try to put the smaller
countries in Africa on a more equal footing with the more
advanced, richer countries. Africa can't yet move like
Europe to a single currency because that involves a lot of
political integration. But they could move to a fixed exchange
rate zone anchored on an African currency linked to either the
euro or the dollar, or to a basket of euros and dollars.
Would that be an existing currency
or would it be like the ecu, the precursor of the euro, a kind
of virtual currency?
have to be a new institution supported by a group of countries
acting together -- the way the CFA franc countries do. There are
13 West African countries that use the CFA franc which is linked
to the euro zone. What this has done is to give those countries
stability and a clear-cut line for their monetary policy and
their monetary and fiscal policy mix. It's important to
stabilize their economies, lock their exchange rates and
converge their economic policies. And as they get closer
together, it would make sense to create an African currency. And
this would give them a common monetary policy and a common
inflation rate, which would help international trade and
investment. It's not perfect because the basic problems of
development in Africa cannot be solved by stable money. All a
monetary system can do is provide a stable environment to foster