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 topic.

Why are commodity prices so low?

Well, 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 special?

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?

It 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 revenues?

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?

It would 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 growth.

28 March 2002