LDC COMMODITY EARNINGS: BUFFETED BY STRUCTURAL CHANGE

• Document Type: CREST
• Collection: General CIA Records
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• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: April 11, 2011
• Sequence Number: 12
• Publication Date: April 1, 1985
• Content Type: REPORT

GI 85-10094
April 1985
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Directorate ofI onfid~nr:ss,-
LDC Commodity
Earnings: Buffeted by
Structural Change
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Directorate of Confidential
Intelligence
Structural Change
LDC Commodity
Earnings: Buffeted by
Economics Division, OGI,
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
This paper was prepared by
Confidential
G! 85-10094
April 1985
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Overview
Information available
as of 20 March 1985
was used in this report.
LDC Commodity
Earnings: Buffeted by
Structural Change F_
Earnings of the less developed countries from nonoil primary commodities
are not likely to rise significantly over the next several years. We expect
earnings by 1990 to rise no higher than 15 percent over their 1983 level of
$92 billion. Although this is higher than the nearly $100 billion earnings
peak of 1980, we estimate these earnings will be just high enough to offset
debt service payments. This outlook is made with the assumption of no
disruption of the current economic recovery and its associated low infla-
tion, high real interest rates, and a strong dollar.
Underlying the cyclical economic factors that determine LDC earnings is a
wide range of long-term structural changes in the commodity markets
themselves. Worldwide demand for these commodities is being restrained
by new technologies, changing consumer preferences, and government
protection of domestic producers. On the supply side, LDCs are raising
domestic production of commodities they have traditionally imported,
encouraging commodity exports to boost foreign exchange earnings, and
cutting their own commodity imports to reduce currency outflows. The
resulting weak demand and abundant supplies will contribute to historical-
ly low commodity prices.
This earnings outlook will have implications in several arenas:
? LDCs as a group will be unable to depend on expanded commodity
earnings to fuel economic growth or help them improve their debt
situation.
? The growing geographic dispersion of commodity production will stabi-
lize supplies and limit price increases from any temporary supply
shortfalls that may occur in major producing regions.
? Increased competition among commodity producers might nurture even
higher levels of protectionism in both LDCs and the developed coun-
tries-pushing prices and earnings yet lower. This is likely to aggravate
North-South tensions and raise LDC demands for economic concessions
by the industrial countries.
? Expanding LDC output, combined with lagging US competitiveness, will
hurt US producers of such commodities as copper, grain, soybeans, meat,
poultry, rice, and sugar.
iii Confidential
GI 85-10094
April 1985
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Although this is the most likely earnings outcome, alternative assumptions
about the world economy lead to scenarios with greater impact. A
prolonged period of negligible economic growth, accompanied by high real
interest rates, low inflation, and a strong dollar, could push earnings down
to $90 billion-comparable to their 1981 low. Such an outcome would lead
to further economic hardship and political unrest in LDCs. By contrast, a
short, sharp recession could shake out marginal producers and reduce
protectionism by increasing the cost of subsidies. An ensuing strong
recovery characterized by high inflation could push LDC commodity
earnings to about $130 billion by 1990.
Regardless of which scenario prevails, the ongoing structural changes in
commodity trade will remain a long-term problem for those LDCs
dependent on commodity exports. LDCs that fare best in these soft
commodity markets probably will be the larger countries with greater
resources-such as Brazil, Indonesia, Malaysia, Argentina, and Chile.
These LDCs are in the best position to expand commodity production,
diversify into new exports, and engage in value-adding commodity process-
ing. The numerous smaller LDCs that depend on commodity exports for
the majority of their earnings will be less able to raise export volume. As a
result, LDCs as a group might face increasing difficulty obtaining
consensus on a wide variety of issues as the larger LDCs capable of
maintaining earnings develop national agendas that are different from
those of the lower-income LDCs.
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The Current Recovery: Leaving Commodities Behind 1
Structural Trends in Commodity Markets: A Growing Cause for Concern 2
LDC Commodity Policies 3
Implications 10
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LDC Commodity
Earnings: Buffeted by
Structural Change F_
More than a third of nonoil export earnings in the
developing countries comes from mineral and agricul-
tural commodity exports. These earnings are roughly
equal to the annual foreign debt service payments by
the less developed countries, according to our esti-
mates. Because of this importance, the health of the
developing economies and their ability to service their
foreign debt will depend in large measure on the
outlook for LDC commodity trade-both prices and
export volumes. The outlook is dramatically different
from that of a decade ago largely because of the
structural changes that have occurred in commodity
markets during the interim.
The Rise and Fall of LDC
Commodity Earnings
Figure 1
Nonoil LDCs: Commodity Earnings
and Debt Service, 1975-83
Debt service
F-1 Earnings
Over the past decade, commodity producers have
experienced both boom and bust:
? In the mid-to-late 1970s, high rates of inflation and
rising commodity demand caused by strong global
economic growth fueled unprecedented increases in
commodity prices, export volumes, and LDC com-
modity-export earnings. These earnings almost tri-
pled during the period between the 1974/75 and
1980 recessions, reaching nearly $100 billion annu-
ally. Healthy LDC earnings, in turn, facilitated
heavy borrowing by LDCs from Western banks
eager to lend recycled OPEC funds (figure 1).
? The short, sharp recession of 1980, followed by the
prolonged 1981/82 contraction, sent commodity
prices tumbling and cut export volumes. The re-
duced level of manufacturing hit Western imports
of mineral and industrial material commodities,
such as rubber and timber, and the consumption of
foodstuffs stagnated as LDCs became less able to
pay for food imports.
In all, nominal commodity prices fell 25 percent
(expressed in dollars) between their peak in 1980 and
their late 1981 lows; real export earnings in the LDCs
fell 17 percent. As a result of these trends, Third
World commodity producers ended 1982 in very poor
shape.
The Current Recovery:
Leaving Commodities Behind
As the global economy came out of recession in 1983,
many observers looked for a repeat of the commodity
price boom that followed the 1974/75 recession-and
a parallel increase in LDC export revenues. Prices did
rise in 1983, but remained about 15 percent below
their 1980 peak. Moreover, a slight drop in export
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ati
volume led to a decline in earnings. In 1984 prices
dropped back to near their recession low, but prelimi-
nary estimates indicate that a sharp increase in export
volume led to a small rise in overall commodity
earnings. We estimate that, in real terms, LDC
commodity export earnings in 1984 were comparable
to 1978-more than 15 percent below their 1980 peak
of $100 billion.
Although demand for commodities historically has
been closely linked to economic activity in the devel-
oped West-which purchases about 60 percent of
LDC commodity exports-differences between the
current and previous recoveries have restrained de-
mand for commodities:
? The strong dollar has made commodities-which
are generally denominated in dollars-more expen-
sive to non-US customers. For example, since their
peak in 1980, The Economist index of commodity
prices has fallen 25 percent in dollar terms, but
prices quoted in British pounds have risen more than
50 percent. This is particularly damaging to LDCs
that depend on non-US markets for sales-such as
African and Pacific Basin exporters.
? High real interest rates and low inflation have
prevailed in sharp contrast to previous recoveries.
High interest rates discourage construction and
manufacturing of metal-intensive consumer dura-
bles by raising the cost of borrowing. Moreover,
high returns on financial instruments make invest-
ments in commodity stockpiles and inventories less
desirable. At low rates of inflation, traders and
consumers have less incentive to hold physical stocks
as a hedge against future price increases or declin-
ing currency values.
? Lagging growth in Europe and Japan has caused
commodity imports by non-US OECD countries to
fall dramatically since 1980, and US imports have
remained more or less steady despite a robust
recovery (figure 2).
Structural Trends in Commodity Markets:
A Growing Cause for Concern
Figure 2
Commodity Imports From Nonoil LDCs:
US Versus Other OECD, 1974-83
patterns and a general lack of new markets for
commodity exports will continue to erode demand. On
the supply side, export-promotion policies and improv-
ing production techniques will virtually assure a con-
tinuation of glutted markets.
Shift in Consumption Patterns
Changing consumption patterns are cutting into de-
mand for both mineral and agricultural products:
? Many commodities are facing serious challenges
from substitutes. Inputs to manufacturing, such as
copper and other metals, natural rubber, and natu-
ral fibers, are being replaced by cheaper synthetics.
Sugar use, for example, is under extreme pressure
from the growing use of alternative sweeteners-
especially high fructose corn syrup and Aspartame.
? Production innovations are reducing the amount of
a commodity required to produce a given product or
eliminating its need entirely. For example, industry
studies show that advances in tin-plating techniques
Underlying these cyclical factors are a number of
structural trends that will continue to suppress com-
modity earnings in the 1980s. Changing consumption
25X1
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are cutting the amount of tin in each unit of output.
Microwave communications, satellites, and optical
fibers are making long-distance copper cables obso-
lete. The demand for cocoa, beef, and other food
commodities is being reduced by the use of
extenders.
? The growth of the recycling industry in the United
States is likely to spread to Japan and Europe,
further dampening demand for imports of primary
commodities such as copper and aluminum. In the
aluminum industry, for example, recycling has in-
creased from 9 percent of consumption in 1979 to 17
percent in 1983, according to Bureau of Mines
studies.
? Changing consumer preferences have decreased
beef, sugar, and coffee consumption in the United
States and increased the consumption of poultry and
noncaloric sweeteners. The oil shocks of the 1970s
have led consumers to buy smaller, lighter weight
cars, which have a lower metal content.
? The rising role of services in the OECD economies
is weakening the link between economic activity and
commodity demand. The reduced importance of
heavy industry has meant materials prices have
risen more slowly than general commodity prices
during the current recovery, when historically the
opposite was true (figure 3).
These structural changes are illustrated by the declin-
ing percentage of commodities consumed for each
unit of economic activity or GNP. For example,
during 1973 in the United States, 1.41 tons of copper
were consumed for every billion dollars of real GNP.
By 1983 this factor fell to 0.96 ton per billion dollars.
Similar declines are occurring in the tin, iron, rubber,
coffee, and sugar markets of the developed West.
Few Growth Markets
The prospect of stagnant commodity demand in the
developed countries has led some observers to argue
that LDCs must look to other regions for significant
market growth. Although LDC imports of commod-
ities rose faster than those of the OECD in the 1960-
80 period, the LDC share of total world imports was
only 19 percent in 1983, according to GATT and
World Bank data. Any large gains are likely to be
delayed for several reasons and therefore not likely to
substantially boost exporter earnings. Austerity pro-
grams caused by debt problems will limit imports of
foodstuffs and hinder the industrial growth required
to support mineral demand. Moreover, wealthier
LDCs may begin to copy the consumption patterns of
the developed countries by adopting high-technology
products, such as plastics, largely skipping the
mineral-intensive, heavy industry growth seen in the
OECD countries. For example, new telecommunica- 25X1
tions systems in LDCs are likely to rely more on
microwave technologies than on copper cables.
The centrally planned economies will not provide the
growth markets needed to lift LDC earnings. The
Soviet Union is mineral rich and does not represent a
large potential outlet for LDC mineral exports, al-
though it does buy some tin and bauxite. In the
agricultural arena where chronically poor harvests
have led the USSR to become the world's largest
grain and sugar importer-benefiting, among others,
both Argentina and Cuba-buying is likely to slow
somewhat, according to our estimates. No major
increases in commodity imports are foreseen because
of increasing domestic production and hard currency
China is a major exporter of rice, fruits, vegetables,
and soybeans and, because of agricultural reforms
and good weather in recent years, has shifted from
being a major importer to a significant exporter of
grain and cotton. On the materials side, China may
boost purchases of construction and industrial materi-
als over the short run as it develops its industrial base.
In the long run, we believe it has the potential for self-
sufficiency in most of these commodities also.
LDC Commodity Policies
On the supply side of the equation, LDC exporters
have helped ensure that commodity prices will remain
depressed. The increasing need for foreign exchange,
which arose out of the LDC debt crisis, led many
countries to increase export volumes even during
periods of weak prices. Although encouraging com-
modity exports to boost earnings might be the optimal
strategy for any given LDC, it will hold overall LDC
earnings down by depressing world commodity prices.
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Figure 3
Commodity Prices: Foodstuffs and Industrial Materials,
1975-84
- Foodstuffs
Industrial materials
I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I i I
40 1 11 III IV I II III IV 1 II 111 IV I II III IV I II III IV I II III IV I 11 Ill IV 1 II 111 IV I II 111 IV I II III IV
1975 76 77 78 79 80 81 82 83 84
Although our analysis indicates overall investment in started by investments made before the debt crunch
LDCs has been curtailed by austerity programs, continue to produce for several years. For example,
excess indebtedness, and high interest rates, invest- cocoa and coffee trees planted in the late 1970s will be
ment in commodity-export industries has not suffered productive for several decades.
as badly. Indeed, there are signs that some LDC
governments are using their influence over investment
allocation to funnel funds toward commodity produc-
tion-at the expense of development of other indus-
tries. In any case, output will remain high as projects
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LDCs are also promoting the production of export
commodities by raising the price paid to producers.
This is particularly true in agriculture, where state
commodity agencies-often under pressure from the
IMF or the World Bank-are setting farm prices
closer to remunerative levels. This has recently been
done in Nigeria, Ghana, and Zambia, according to
Embassy reporting. Recent austerity programs that
involve currency devaluation have also encouraged
production by raising the local value of export goods
in return for hard currency. Although fiscal cutbacks
in many LDCs have reduced the funds available for
subsidies, the need for foreign exchange means gov-
ernments are more likely to reduce support for com-
modities consumed domestically than for export com-
modities. Finally, even for those LDCs that are net
commodity importers, such policies restrain imports
and reduce global demand.
Overproduction is being exacerbated by the rapid
development and diffusion of technologies that are
lowering production costs and raising yields. For
example, Asian rice yields per acre increased 60
percent between 1963 and 1983, according to US
Department of Agriculture statistics. The simple in-
troduction of the Cameroon weevil into Southeast
Asia has greatly enhanced palm oil production there;
Malaysian palm oil production has more than doubled
since 1977. New exploration and extraction tech-
niques are progressively enlarging potential mineral
reserves in many LDCs despite declining ore grades in
existing mines. For example, hydrometallurgical tech-
niques have enabled copper producers to efficiently
extract metal from material once considered waste,
Although this trend
bodes well for export volumes, increased production
will put further downward pressure on world prices.
Protectionism
Global agricultural protectionism will also depress
world prices and limit export volume increases. Coun-
tries of the industrialized West are likely to continue
to protect their domestic commodity-producing sec-
tors with export subsidies and import barriers because
of the influence of powerful farm and labor lobbies.
For example, Japanese consumers pay several times
the world price for rice and beef, and sugar costs EC
consumers five times the world price. The Common
Agricultural Policy (CAP)-initiated in the early
1960s to promote agricultural self-sufficiency in the
community-has changed the EC from a major outlet
for LDC commodity exports to a major competitor.
The EC now sells both wheat and sugar on the world
markets at prices substantially below what it pays
farmers to produce them. Until the burden of these
protectionist measures exceeds the willingness of tax-
payers and consumers to bear them, we see little hope
for a reduction in such government interventions.
Economic forces are spreading protectionism beyond
the OECD countries to the LDCs themselves. In their
efforts to improve their balance-of-payments posi-
tions, LDCs are likely to further restrict imports of
basic commodities while trying to increase food self-
sufficiency. There are signs that several of the newly
industrializing countries (NICs) are beginning to emu-
late the protectionist policies of the wealthier coun-
tries. For example, South Korea maintains domestic
rice prices at three to four times the world level,
according to Embassy reporting. Such a trend would
be especially harmful to commodity exporters because
the NICs are perhaps the best potential growth
market for commodities.
Earnings Prospects to 1990
We believe that by 1990 LDC commodity export
earnings will increase slowly to as much as $105
billion. This earnings level would be 15 percent over
the 1983 level in nominal terms but could mean little
or no growth in real terms. This scenario assumes that
the structural changes underlying the commodity
markets will continue and no major shifts will occur in
the growth path of the current economic recovery:
? Global economic growth at about 3 percent annual-
ly through the end of the decade will be necessary to
support this earnings outcome. Growth significantly
slower than this could erase any volume increases.
? A strong US dollar-largely the result of continued
high real interest rates and faster growth in the
United States than in the rest of the OECD-will
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Figure 4
Boom and Bust Cycle: The Road to Stagnant Earnings
Commodity price
increases
Higher apparent
returns on commodity
investment
Heavy investment
in commodity
production
Recession and Waning
Demand
Price declines
Increases in
commodity production
Low Inflation and
Economic Recovery
Lower prices
Debt crisis and
the need for more
foreign exchange
Stagnant
earnings
dampen commodity demand by making foreign tions required to produce more pessimistic and opti-
importers of commodities face expensive currency mistic cases. Earnings projections under these scenari-
transactions when buying dollar-denominated os are based on historical analogues.
commodities.
A Pessimistic Case:
? Low inflation held down by the strong dollar will Declining Revenues
prevent the type of inflation-driven commodity price If the current economic recovery lapses into a pro-
increases that occurred in the 1970s (figure 4 and longed period of negligible growth, by 1990 earnings
table 1). could drift down to their 1981 low point of about $90
Although we believe that slow growth in commodity
export earnings through the rest of the decade is the
most probable outcome, we have examined the condi-
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Table I
The Outlook for Commodity Markets:
Winners and Losers
Factor
Trend
LDC Export
Volume
Effect
LDC Export
Price
Effect
Winners
Losers
OECD growth
Moderate
Higher
Moderate rise
Producers
Current consumers,
importers
Dollar strength
Continuing strong
Lower
Lower
US importers
Exporters to non-US
markets
Higher
LDC exporters
Western producers,
importers
Lower
Lower
Exporters with
access past
barriers
Exporters without
access
Changing consumption patterns
Reduced commodity
intensity
Lower
Lower
Wealthier LDCs
Unstable and smaller
LDCs
Lower
LDCs with
access to capital
Poorer LDCs
Higher
Larger LDCs
with access to
capital
Smaller LDCs
Lower
Resource-rich
LDCs
Resource-poor LDCs
billion-a few percentage points below 1983 earnings.
Such a period of economic stagnation could be accom-
panied by high real interest rates, very low inflation,
and a strong dollar. Such an earnings decline, along
with the high debt service payments required by high
interest rates, would push many LDCs to face further
readjustment of their domestic economies, possibly
leading to a rise in political unrest. Overall commod-
ity demand would suffer directly from reduced indus-
trial activity and consumer spending in the importing
countries. A slowdown in manufacturing would hit
minerals prices hardest. High interest rates, low infla-
tion, and the strong dollar would discourage holding
stocks of minerals for speculative purposes while
evaporating the credit needed to finance international
trade. Higher cost Western farmers and mining com-
panies might, in the face of low demand and world
prices, succeed in persuading governments to raise
more protectionist barriers against LDC imports.
Tighter trade financing coupled with more protection-
ism would accelerate the growing use of countertrade.
On the supply side, LDCs facing falling prices would
have difficulty maintaining their "export at any cost"
philosophy because there would be few buyers. F_
An Optimistic Case:
Rising Volume and Prices
Although we doubt that commodity export earnings
will rise much above their 1980 peak during this
decade, we can envision a scenario under which export
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Nonoil LDC Commodity Export Earnings
Actual case
1990
Projections
earnings increase significantly-perhaps to as high as
$130 billion (figure 5). We believe such an increase
could be brought on by a short, sharp recession-
necessary to trim excess producers from the mar-
kets-followed by a robust global recovery. This
favorable outcome assumes governments do not in-
crease protection of their commodity industries. For
the high-cost, marginal mineral producers in the
industrialized countries, another recession in the near
future would produce a shakeout of inefficient pro-
ducers. On the agricultural side, such a recession, if
accompanied by a weaker dollar or sharply reduced
US farm support prices, could put strong pressure on
the EC export restitution and domestic price support
system. The increased value of EC currencies would
make European agricultural goods more expensive,
and, as the gap between EC and world market prices
widened, deficits could force the CAP system to
collapse of its own weight.
With LDC exporters facing fewer protectionist barri-
ers and less competition, a strong recovery following
such a recession could raise prices sharply. If interest
rates and the value of the dollar remained low,
commodity demand by non-US importers would be
heavier and the cost of holding stocks, low. Moreover,
sustained double-digit inflation skewed in favor of
commodity prices-like the inflation during the
growth period of the 1970s-would make holding
physical stocks more attractive for the speculator and
user alike. This increased demand along with good
weather and political stability in the exporting LDCs
could sharply raise overall earnings.
Unlike the 1970s when the rising tide of prices lifted
the earnings of all the commodity exporters, the
stagnant prices we foresee for the late 1980s will leave
behind those LDCs that cannot expand their export
volumes. The larger, resource-rich LDCs will be able
to maintain some earnings growth by increasing their
export volume, diversifying into new products, and
engaging in value-added production. In contrast, the
smaller, resource-poor exporters will find it increas-
ingly difficult to raise export earnings in an era of
restrictive trade practices. These disparities become
evident in the more important markets (table 2):
? Copper. Chile, the largest and lowest cost producer
of copper, will probably continue pushing exports-
helping to keep copper prices low. For the smaller
producers, such as Peru, Zaire, and Zambia, which
cannot match Chile's volume increases, earnings
will stagnate or decline. In addition, Brazil is ex-
panding copper output significantly to substantially
reduce its imports, and Mexico may soon become a
net copper exporter.
? Rubber. Major expansion plans by the three big
producers-Malaysia, Indonesia, and Thailand-
will keep supplies plentiful. Smaller producers, such
as Sri Lanka and Liberia that respectively depend
on rubber for 11 and 17 percent of export earnings,
will be less able to boost volume to compensate for
low prices.
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Table 2
Commodity Markets: Representative
Country Performances
Market Likely To Likely To
Do Well Do Poorly
Copper Chile Peru
Brazil Zaire
Mexico Zambia
Rubber Malaysia Sri Lanka
Indonesia Liberia
Thailand
Cocoa Brazil Ghana
Malaysia Togo
Benin
Cameroon
Sugar Brazil Caribbean countries
India Fiji
China
Sudan ? The natural rubber agreement, also due to expire
International Commodity Agreements:
Ailing But Not Dead
Price-maintenance international commodity agree-
ments (ICAs) exist for cocoa, tin, rubber, and coffee.
The ostensible purpose of such ICAs is to stabilize
international prices around long-term trends through
the use of bufferstocks and export quotas. Despite
ongoing efforts within the UN community, it is
unlikely that many new ICAs will be negotiated to
add to the existingfour:
? The tin agreement, set to expire July 1987, is beset
by huge stocks, declining demand, rampant smug-
gling, and expanding exports by nonmembers.
? Cocoa talks aimed at renewing the ICA set to
expire in September 1985 are making little head-
way. Differences exist over the level of target prices
and what kind of export quotas should supplement
the existing bufferstock.
Cotton China Pakistan
Egypt
Nicaragua
Paraguay
Mali
Liberia
Mauritania
? Tin. Although Bolivia, which relies on tin for a'third
of its export earnings, has had critical production
problems, Brazil more than tripled its tin exports
between 1980 and 1984. The Association of Tin
Producing Countries, made up of Bolivia, Nigeria,
Malaysia, Indonesia, and Thailand, blames Brazil
for weak tin prices, but the market is also beset by
declining tin use, chronic overproduction, and ram-
pant smuggling. Indeed, little or no increase in
prices or volumes is likely.
? Cocoa. West African countries, such as Ghana,
Togo, Benin, and Cameroon, depend on cocoa for 10
to 45 percent of earnings but probably will continue
to lose market shares to Brazil and the wealthier
Asian producers. Since 1980 production has fallen
16 percent in West Africa, but it has risen 79
percent in Asia-largely because of a tripling of
output by Malaysia.
? Sugar. Because of high production in Brazil, Asia,
and the EC, sugar prices have been pushed to their
lowest level in real terms since the 1930s. This has
later this year, is entering renegotiation. A proposed
pact provision assuring that suppliers will not try to
affect rubber prices unilaterally is the first obstacle.
? The coffee agreement, scheduled to run to 1989, is
plagued by disputes over the amount of coffee
released to the market and the allocation of export
quotas.
Last year the sugar agreement lost its price-mainte-
nance provisions, and efforts to form a tea pact failed.
Ratification of the Common Fund (CF), an UNCTAD
initiative that would finance price-stabilizing buffer-
stocks for a wide range of commodities, is unlikely
after nine years of effort because of the reluctance of
the United States and existing ICAs to join the CF.
(C NF)
The failure of such agreements may spark LDC
interest in other measures. Already there is a trend
toward administrative agreements designed to facili-
tate increased market information and product re-
search. Commodities governed by such pacts include
sugar, jute, bananas, wheat, and tropical timber.
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severely hurt exports and earnings in scores of
sugar-exporting countries, particularly smaller ones
such as Belize, Fiji, and the Dominican Republic,
where sugar accounts for 35 to 90 percent of
earnings. Meanwhile, the sugar-producing giants-
Brazil, India, and China-have boosted production
35 to 65 percent since 1980.
? Cotton. In the past four years Chinese cotton pro-
duction has almost doubled to 21.3 million bales-
nearly a third of global output. During crop year
1979/80 China imported 20 percent of the cotton
traded on the world market, but this year it is
expected to account for 5 percent of world exports-
a trend the Chinese Government intends to encour-
age. In addition to taking traditional US markets,
these exports will hurt Pakistan, Egypt, Nicaragua,
Paraguay, Mali, and Sudan, where cotton exports
accounted for 10 to 50 percent of earnings in 1983.
? Iron ore. Next year Brazil's giant new Carajas mine
will begin producing magnesium, nickel, bauxite,
and large amounts of low-cost, high-grade iron ore.
Some estimates put 1988 iron ore output from
Carajas at 5 percent of world production. Carajas's
output, along with new mines in Australia and
expected declining world demand through 1990, will
keep ore prices down-undercutting earnings for
Mauritania and Liberia, which depend on iron ore
for roughly half of their export earnings.
LDCs able to enter into value-added production-
such as crushing soybeans into meal and extracting
the vegetable oil or refining chromite into ferro-
chromium-can partially offset the impact of lower
prices by selling more expensive, processed products.
Only the larger, more stable LDCs will succeed with
this approach, however, because of the investment
required and the need for an adequate supply of raw
inputs. Indonesia, for example, has reduced log ex-
ports and increased lumber-product exports by build-
ing 80 plywood factories since 1974; it has more
factories planned. In contrast, according to Embassy
reporting, an effort to grind cocoa beans in Ghana is
beset by electric power outages.
Some LDCs are making effective use of taxation and
export price incentives to encourage commodity pro-
cessing. According to Embassy reports, Malaysia, for
example, imposes high taxes on raw palm oil exports
to effectively subsidize refined vegetable oil exports.
Similarly, production and export incentives have
made Brazil one of the world's leading exporters of
frozen concentrated orange juice and soy products.
The smaller LDC producers whose economies rely
heavily on earnings from one or two commodities will
be most hurt by the growing geographic dispersion of
production. This, along with a growing list of com-
modity substitutes, will tend to limit price increases
when major producing regions experience temporary
supply shortfalls. For minerals, labor strikes become
less significant as more countries open new mines for
copper, iron ore, tin, and other minerals. Sugar crops
in Europe will keep supplies up during bad weather in
the tropical regions, while West African droughts
have already become less critical for cocoa prices as
production rises elsewhere. This means that a country
with a shortfall will be less able to count on sharp
temporary price rises to offset low earnings from
longer term soft markets. Furthermore, those LDCs
that diversify their export base will buffer their
economies from the price swings of any single com-
modity.
On balance, those LDCs that succeed in these export
markets are likely to be the larger countries with
greater resources and stability. The countries most
able to continue diversification into a wider range of
commodity exports while developing their commodity-
processing industries are Brazil, Malaysia, Indonesia,
and Thailand. Other large LDCs will depend on
volume increases of their export mainstays. Argentina
plans to significantly increase its grain exports, and
Chile is expanding its copper production.- Most small-
er LDCs-whose economies are usually dependent on
commodity exports-will face stagnant world prices
and only marginal improvements in their export vol-
ume.
The relatively small increase we foresee for commod-
ity earnings during the rest of the decade will contrib-
ute little to overall LDC growth prospects. Assuming
no major changes in the level of LDC debt over the
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next several years, commodity export earnings are
likely to remain just high enough to offset debt service
payments. Such prior claims on future earnings will
preclude LDC use of their agricultural and mineral
resources to fuel the kind of rapid economic develop-
ment experienced in the 1970s. Moreover, continued
LDC emphasis on expanding commodity export vol-
ume will draw resources away from efforts to diversify
into manufactured exports and develop domestic in-
dustries.
Chronically low commodity prices could increase de-
mands by LDCs in international forums for some
form of economic redress. Given the general ineffec-
tiveness and current problems of price-maintenance
international commodity agreements, we see little
likelihood that the LDCs will push hard on this front.
One initiative that LDCs might focus their efforts on,
however, is the creation of a compensatory financing
facility under the auspices of the UN Conference on
Trade and Development. Such a fund in theory would
be similar to, but much larger than, the current IMF
facility used to compensate LDCs facing temporary
earnings shortfalls because of low export prices.
At the same time, however, the circumstances that
would lead to such demands could increase LDC
difficulty in obtaining consensus on a wide variety of
economic and political issues. The larger LDCs capa-
ble of maintaining earnings through increases in
export volume will begin to develop national agendas
that are different from those of the smaller, struggling
LDCs. Such a split would leave these lower-income
LDCs without their traditional strong allies in North-
South discussions and could well weaken the overall
negotiating strength of such LDC alliances as the
Group of 77.
Worldwide trade tensions probably will be raised as
exporters in both LDCs and the developed West face
low world prices, diminishing markets, and more
import barriers. These developments will put further
competitive pressure on US commodity producers.
Because US copper producers have the world's high-
est break-even production costs-45 percent higher
than that of the lowest cost producer, Chile-they will
face increasing difficulty competing against copper
imports. Japanese and European steel producers have
signed long-term contracts to buy cheap iron ore from
Brazil's Carajas mine. This decline in input costs for
these foreign steelmakers will further undercut the
competitiveness of US producers and add to OECD
trade disputes. On the agricultural front, without
current import quotas, which keep domestic sugar
prices at roughly five times the world market level,
many US sugar producers would not survive the
competition from subsidized and low-cost foreign
exporters.
The depressed markets faced by LDC commodity
producers also plague US exporters. Expanding grain
exports by the major grain exporters-Argentina,
Canada, Australia, and the EC-along with increased
food self-sufficiency in other countries-China, India,
Saudi Arabia, and Zimbabwe-will cause outlets for
US grain to shrink. Similarly, increased exports of
soybeans and poultry from Brazil, beef from Argenti-
na and the EC, and rice from Thailand are eroding
US markets for those commodities.
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