Aid, Trade and Economic Development

WHAT POLICY FOR COMMODITIES?

OVER the past century and a half, periods of falling commodity prices have raised great political issues. In our history, for example, they profoundly affected the age of Jackson, the era of Bryan and the Populists, and the New Deal. These ferments, so familiar in our national experience, now beset us on a world scale. Food and raw-materials prices have been drifting downward, and the underdeveloped areas which bear the brunt offer their protests in various international forums. The past year's upturn in prices has not diminished the pressures for reform of commodity policies. The less developed countries' representatives believe that current price improvements are only a temporary fluctuation around an unfavorable trend. Their concern may be exaggerated, but a review of the record and prospects shows that it is far from groundless.

In that setting, this article seeks to come to grips with two issues. First, what role can commodity policy play to help meet the less developed countries' foreign-exchange needs? Second, in light of the political and economic importance of commodity policy, how much-or how little-could international commodity agreements, aimed at raising the prices of individual commodities above current levels, contribute to those needs? Estimates of the effects of a deliberate policy of higher commodity prices are obviously approximate. They do indicate what relative part commodity schemes can play in meeting a central economic issue for the less developed countries.

Of the many causes of slow growth in those countries, we are concerned here with only one-the inadequate inflow of foreign exchange-and the evidence in that respect is straightforward enough: the exchange earnings of less developed areas are remarkably stable in the aggregate; over the last six or seven years, exports have not been increasing. The table on the next page gives the totals and shows the part played by each of the major elements: commodity exports, exports of manufactures, foreign aid and foreign private investment. The figures show that the value of exports increased only 10 percent from 1956 through 1961. During the same period the exports of industrial countries rose by 26 percent. Of the six categories listed in the table, only two-petroleum exports and foreign aid- increased sharply.

Why has trade been so sluggish, and where is it likely to go from here? Let's examine the situation by category.

(1) Commodity Exports. In 1960 commodity trade accounted for 86 percent of the exports of less developed countries, virtually unchanged from 1956. If we include all the major foreign exchange sources, by adding net private investment and foreign aid, commodity exports still accounted for 66 percent of this larger total in 1960. This, in short, is where the money is. Therefore, whether or not the flow of economic aid does increase, the earnings from commodity trade will remain pivotal for many countries. Yet, both the recent trend as shown in the accompanying table and the free- market prospects of the next decade as estimated by the United Nations are not encouraging.[i]

EXCHANGE RECEIPTS OF LESS DEVELOPED COUNTRIES* 1956-1961 (in billions of dollars)

Agricul- tural Raw Year Foods and Materials Petroleum Manu- Private Foreign Total Beverages and and other factures Investment Aid Mineral Fuels (Net) Ores

1956 8.0 7.0 6.5 3.3 3.0 3.7 31.5 1957 8.3 6.9 7.0 3.2 3.5 4.6 33.3 1958 8.2 6.2 7.4 2.8 2.5 5.2 32.3 1959 7.8 7.2 7.3 3.3 2.3 5.3 33.0 1960 8.1 7.6 7.7 3.7 2.5 5.9 35.5 1961 8.0 7.4 8.1 4.0 2.7 6.5 36.7

Source: United Nations, Monthly Bulletin of Statistics, March 1962-March 1963; OECD, The Flow of Financial Resources to Countries in the Process of Economic Development.

* Less developed countries are here taken to include: Latin America, Africa (except South Africa), Asia (except Japan, Mainland China, North Korea, Viet Nam, Mongolia); and Oceania (except Australia and New Zealand).

For some commodities the declining trend in prices started after the end of the Korean War and for others about 1955. A few commodities-petroleum, bauxite, aluminum-did not share in this general decline. The reasons underlying the falling prices of other commodities have been discussed by a number of writers;[ii] there is no need to dwell on them here. They include: (a) the tendency in high-income countries for demand for food to increase slowly-more nearly in proportion to population growth, for example about 1.5 percent a year, rather than in proportion to income growth which might average about 4 percent a year; (b) the demand for industrial raw materials, such as rubber and minerals, has been affected both by the growth of synthetic substitutes and the tendency of industrial countries to use smaller amounts of raw materials per unit of final output; (c) the supply of many products, particularly tree crops, was greatly stimulated by the high prices of the early 1950s; (d) in many less developed countries there is no ready alternative to producing the traditional export crops.

What about the future of commodity prices and earnings? Among major crops, which concern us most here, there is none that has favorable price prospects over the next decade. In general, the best that can be expected in that period for any major commodity is stable prices; this may be the case for certain fats and oils and for aluminum. Others, such as rubber and jute, are not likely to maintain even present prices. Pressures on coffee prices, and to a lesser extent cocoa and tea, may be strong.

The less developed countries, often supported by the United States, have emphasized the importance of removing restrictions on consumption, such as high tariffs or domestic consumption taxes on tropical products. This has been particularly stressed since the establishment of the European Economic Community, which adds a system of preferential duties for its associated overseas territories to existing tariffs and fiscal charges on tropical crops.[iii] There is no doubt that the existing tax structure does inhibit consumption of some of these crops. This is notably true for coffee in Germany. There is certainly very little justification for continuing these taxes; Western European governments have in general an ample variety of tax sources, and there is no reason why their policies should needlessly restrict the exchange earnings of less developed countries.

It is important, however, not to exaggerate the effects of abolishing these taxes. Tinbergen has estimated that in 1959 the net effect of abolishing all duties and charges on coffee, tea and bananas in industrialized countries would have been an increase of $64 million in the export earnings of less developed countries. Abolition of major importing countries' tariffs on sugar would have had a much more important effect, amounting to more than $400 million in increased imports for the year 1959. However, sugar is produced domestically in all importing countries and the chances for any substantial move toward world free trade in sugar are slim.

Therefore, it should be realized that in practice the increase in foreign- exchange earnings resulting from abolition of tariffs and charges will not be great. Efforts to raise the level of export earnings from commodities can depend only to a limited degree on freer trade as a solution. Industrial countries show no signs of abandoning agricultural protection. And it is only for protected commodities-such as sugar, oil seeds and nonferrous metals-that freer trade would have a major effect on the earnings of less developed countries.

(2) Foreign Aid. Gross Western foreign aid to less developed areas increased from $3.7 billion in 1956 to $6.5 billion in 1961 (about $6.4 billion in 1962). It is now a major item in the inter national accounts of less developed areas, and a number of countries are heavily dependent on it. Aid now accounts for about 17 percent of their foreign-exchange revenues. This very considerable sum is unlikely to increase at anything like the recent rate-if at all. Europe has increased its aid effort substantially, partly in response to pressures from the United States. If the U.S. contributions remain where they are or-as seems more likely- decline, other countries will be in a better position to resist U.S. influence.

Furthermore, the real increase in foreign aid has been much less than the gross figures suggest. Most aid is in the form of loans. Six years ago, developing countries were spending approximately $1 billion a year for principal and interest payments on foreign loans. Today that figure is more than $2.5 billion. The West could increase the real aid flow by offering more grants and long-term loans at low interest. So far, most European countries have been reluctant to move in this direction. However, despite stalwart resistance, it seems likely that aid terms in the future will be more generous.

(3) Industrialization and Export of Manufactures. In the short run, foreign aid and higher commodity prices, where they are feasible, offer the principal source for increased receipts. In the long run, however, self- sustaining economic growth will generally require economic and social reorganization. The less developed areas will have to industrialize, with some proportion of the output substituting for present imports and some of the rest being exported.

Exports of manufactured goods from the less developed countries have increased fairly steadily but more slowly than the output of industry in these areas; much of the less developed world's industrialization has gone into the production of goods for the domestic market, to replace products that were formerly imported. There are a number of reasons why growth of manufactured exports has been slow. First, domestic markets in a number of countries are too small to allow mass production of various capital and consumer goods; therefore, it is difficult to bring costs down low enough to compete in export markets. Second, some products require very heavy initial investment or the mastery of complex techniques, and in less developed areas both capital and technique are at a premium. Third, in the fields where developing countries are able to compete-for example, textiles, clothing, leather goods, bicycles, furniture-these industries face real barriers on world markets. The present trade policies of developed countries tend to restrict "low-wage" imports. In general, internal political forces in the West will oppose massive increases in imports of these products. Until the West changes its policies, the best that can be hoped for is a gradual increase-one that would allow the less developed countries to share in the growth of domestic markets in the industrialized nations.

(4) Foreign Private Investment. Foreign private investment can be an effective method of promoting industrialization, because it allies capital with technical knowledge. However, the short-term prospects for an increased flow of investment are poor. The trend in world markets, the favorable investment opportunities at home and the political risks abroad all serve to discourage private investment in the developing areas. In order to promote a greater flow of capital not only will governments in investing countries have to offer comprehensive guarantees, but also host countries will have to extend foreign investors a more favorable reception than they have, in many cases, recently offered. A more imaginative approach might bring a handsome payoff. For example, relatively little has been done to utilize Western capital and technique through the device of government guaranteed or financed joint ventures that could be progressively turned over to local management and ownership.

In general, then, there is little prospect for rapid increases in foreign- exchange receipts, except possibly for the petroleum exporting countries. There is some likelihood of a slow increase in the effective flow of foreign aid through easier loan terms. The growth of manufactured exports depends in large part on the import policies of developed countries; at this writing, it seems unrealistic to expect any important changes soon. Private investment, a most effective contributor to economic development, remains a question mark. With the proper economic and political incentives from both the industrial countries and the host nations, the possibilities are good. So far, the record on the whole has been dismal.

In short, the present structure and trends of trade of the less developed areas are likely to continue. Institutional barriers will probably continue to hold back the growth of industrial exports; sluggish demand and unresponsive supply will continue to keep commodity prices down.

II

Is there anything that can be done by international agreement to raise commodity prices? A device for deliberately raising the level of commodity prices and earnings would be one method of increasing the flow of resources to less developed countries. As we shall see, it could in theory significantly increase the export revenues of a number of countries; but an effective system of commodity agreements, which would be difficult to achieve, would be only a modest element in any comprehensive effort to raise the export revenues of less developed countries.

Discussion of the commodity problem has been confused by a number of doctrinal or emotional predispositions. Representatives of the underdeveloped countries have sometimes maintained that the industrial nations in effect pocket the increased productivity of commodity exporters in the form of lower prices. Prices, they argue, should be set higher by agreements; then less developed countries could increase their incomes, pay for their import needs and develop at a rate commensurate with their ambitions. They state that the only thing that is lacking is willingness on the part of industrial nations to coöperate in such schemes. Furthermore, they point out, industrial countries are perfectly willing to negotiate for higher prices for their own agricultural commodities, both domestically and internationally.

Representatives of the industrial countries, as well as professional economists, have often argued that commodity markets should be free, except in crisis situations, because free markets will in the long run call forth the right supply at the right price. Tinkering with the free market raises all sorts of difficulties with production control, export quotas, exporters who refuse to join the agreement, pressures of stockpiles on the market, dangers of substitution of other products when the price of a given commodity goes too high. They state that to abandon free-market prices will create more problems than it solves. Increasing the flow of funds to underdeveloped countries should be done directly through aid and not indirectly through measures which are unlikely to be effective, and will also reduce donors' control over aid.[iv]

It is obviously unrealistic to expect that commodity agreements can result in raising the general level of all commodity prices; as we shall see, price-fixing techniques could be effective for only a limited number of crops. On the other hand, devotion to free markets and arguments in favor of direct aid rather than higher prices are not always realistic either. If we accept the thesis that it will be difficult to achieve further increases in foreign aid, then the alternative is not genuine. Economists sometimes sound as if they were saying that it is impossible to maintain prices above free-market levels. In fact, however, producers of some commodities have benefited from high fixed prices for many years, and in certain cases, have also been able to enjoy a steady growth of markets. The recent article by William Butler in Foreign Affairs, already cited, states: "Over-all prospects for food and industrial raw-materials exports from less developed nations are not at all bleak. Consumption of some primary products will rise more rapidly than the average-for example, petroleum, bauxite, aluminum, and the newer metals." It is worthy of note that the producers of these commodities have not always been distinguished for their adherence to free-market principles.

Of course, countries that produce these products are lucky; they can, until further notice, have their cake and eat it. But this section deals with the possible outcome of a commodity policy designed to transform free commodity markets into regulated ones, where feasible.

Opinions, as usual, conflict. What are the facts about what commodity agreements can and cannot do to raise prices and earnings?

(a) Which commodities could be controlled? Commodity price-fixing agreements can work for only a very few commodities. First, we have to rule out all products that face close competition from synthetic substitutes. These include rubber, jute and cotton. They accounted for about $2.6 billion of the $15.7 billion total of commodity exports in 1960.

Second, some commodities face competition from natural substitutes or from exports of the same product by industrial countries. This group includes vegetable oils and oil seeds, nonferrous metals, citrus fruits and tobacco. Less developed countries exported $2.8 billion worth of these in 1960. Agreements for these products are not feasible for a variety of reasons. In the case of oils and oil seeds, for example, the structure of demand and supply allows substitution among a variety of vegetable oils, animal fats, fish oils and synthetic detergents; and the complexities of regulation would be staggering. Nonferrous metals present a somewhat analogous situation, primarily because of substitution between aluminum and copper. This situation is also complicated by the practice of using reclaimed or secondary metal when virgin metal prices rise. Furthermore, for nonferrous metals, as for tobacco, citrus fruits and cotton, it is hard to believe that importers would be willing to transfer income to developed countries simply for the sake of the economic benefits to less developed areas.[v]

The third group consists of one product-rice. Less developed countries account for the vast majority of world exports ($426 million of a world export total of $552 million in 1960) but also for most of world imports. The effect of a commodity agreement to stabilize and raise rice prices would therefore be initially to redistribute income among underdeveloped countries; and later to stimulate the drive for self-sufficiency in rice production already under way in many importing countries.

This brings us to the fourth group-commodities for which there is some prospect of stabilizing and gradually raising world prices, within the limits imposed by possible substitution. These include coffee, tea, cocoa, sugar and possibly bananas. (A few other minor crops might also be included but their total value is small in world trade.) These five crops provided less developed countries with about $4.6 billion in foreign-exchange earnings in 1960. In that year they accounted for 57 percent of all food and beverage exports of the underdeveloped countries.

(b) Which countries would be affected? These five commodities are important to the export trade of more than 30 countries, primarily in Latin America and Africa. At least 15 countries rely on one or more of these products for more than half of their export earnings. In Latin America the list includes such countries as Colombia, Brazil, Costa Rica, Ecuador, Guatemala; in Africa, Ivory Coast, Ghana, Cameroun, Ethiopia; in Asia3 only Ceylon, Taiwan, and, to a lesser degree, India. Roughly speaking, commodity price- fixing could help about one-third of the world's underdeveloped countries. (See table on the next page.)

(c) How much would these countries benefit? Higher commodity prices mean higher revenue for exporters only if: (1) there are no existing close substitutes for the product; (2) the proportion of consumers' income spent on the product is small; (3) the higher prices do not call forth the creation of synthetic substitutes. Therefore, there will always be limits to the long-run price levels that can be maintained. These limits will determine the exporters' maximum gain. In estimating these limits, we must take account of past performance of the market for these products, prospects for development of substitutes and estimates of elasticity of demand.

Consideration of past performance of the market leads to a decision not to try to achieve prices as high as those that prevailed during the peak period of the early 1950s. In general, these prices could not be sustained for long; and any serious effort to maintain them would erode the long-run market for these crops.

In light of these considerations, the table shows what would happen to export earnings if prices of these crops were raised to target levels that could be sustained without encouraging long-run substitution. Demand for these products is "price-inelastic" within a moderate range. That is, increases in price result in increases in total sales revenues. Demand for coffee, tea and sugar is particularly inelastic, because people use these products habitually, there are no close substitutes and only a small proportion of total income is spent on them. Thus, when sugar prices double, as they did in 1963, consumption falls relatively little. The demand for bananas is relatively more elastic because other fruits compete directly. Therefore, the price of bananas cannot be raised very much in the long run without actually reducing exporters' revenues.

EFFECT OF POSSIBLE COMMODITY AGREEMENTS ( COFFEE, TEA, COCOA, SUGAR, BANANAS) ON EARNINGS OF INDIVIDUAL COUNTRIES (in millions of dollars)

Projected Projected Percent "Target"* 1971 Earn- 1971 Earn- Increase Actual Prices ings at ings at 1961-1971 Country 1961 1961 1961 "Target" (Col. 4 + Earnings Earnings Prices Prices Col. 3)

LATIN AMERICA

Brazil 804 1009 967 1367 41 El Salvador 70 87 96 120 25 Costa Rica 61 72 85 101 19 Colombia 323 380 444 521 17 Guatemala 85 97 118 135 14 Mexico 142 159 177 201 14 British Guiana 27 30 30 34 13 West Indies 72 80 80 90 13 Dominican Republic 86 95 101 113 12 Panama 20 22 29 32 10 Honduras 29 31 41 45 10 Ecuador 81 83 117 119 2

AFRICA

Ethiopia 43 54 59 74 25 Kenya 11 13 13 16 23 Angola 64 77 87 105 21 Ivory Coast 124 150 170 204 20 Cameroun 46 55 63 75 19 Ghana 194 231 262 311 19 Nigeria 95 108 128 146 14 Nyasaland 12 14 15 17 13 Mauritius 45 50 50 56 12

ASIA

Indonesia 36 44 45 54 20 Ceylon 234 260 290 322 11 Taiwan 67 64 65 72 11 Fiji 13 15 15 16 7 India 260 278 323 344 7

* Target prices, as compared to average world prices in 1961, are as follows:

Average 1961 Price Target Price (U. S. Cents per pound)

Coffee 30.7 48.0 Cocoa 21.8 29.0 Tea 48.5 64.0 Sugar 3.9 5.0 Bananas 3.8 4.7

The target prices shown allow for differences in price elasticities of demand among these crops. Columns 3 and 4, showing projected 1971 demand, take into account the differences in the growth of demand among these crops. As incomes and populations grow in importing countries the demand for coffee, for example, is likely to grow faster than the demand for tea.[vi]

At these target prices, under an effective system of commodity agreements, less developed areas would have earned $700 million more from this trade in 1961 than they actually did in that year. Looking forward to 1971, and taking account of population and income growth, they would earn about $900 million more at these target prices than they would if 1961 prices were to prevail.

Most of the revenue increase (about 55 percent) would accrue to coffee exporters. Tea producers would receive about 13 percent of the benefits; cocoa growers about 10 percent; sugar producers about 17 percent and banana exporters less than 5 percent.

These differences reflect several factors: (1) coffee is the most important agricultural commodity in world trade, and therefore anything which affects its price has a strong impact; (2) coffee prices can be raised relatively more than the prices of other crops because substitution is less of a problem; (3) cocoa prices can be raised only slightly in the long run because at high prices cocoa faces active threats of substitution from vegetable oils and from other confectionery products; (4) bananas also face close competition from other fruits, and could probably gain more from removal of existing restrictions on trade than from price-fixing arrangements; (5) much of the world sugar trade is already carried out under price-fixing agreements; any sharp increase in prices would stimulate domestic production in importing countries, unless offset by importers' guarantee to maintain their imports. Thus present world sugar prices are far higher than the 5-cent target price suggested above. However, it seems safe to assume that it will be impossible to maintain export prices much higher than 5 to 6 cents per pound over the long run, because above this level it becomes quite profitable to produce beet sugar in temperate zones. The target used here is about 20 percent above the average price during the period 1955 to 1960.

(d) Who would pay the higher prices for the increased earnings? About 40 percent of the value of these five crops is now ex ported to the United States; another 40 percent is exported to Western Europe; the rest is divided among Canada, Japan, the Soviet bloc, Australia and New Zealand. Although there are a number of qualifications, the incidence of higher prices-in effect a sales tax-would be about evenly divided between the United States and Western Europe. This means, assuming an average annual increase in export earnings of $800 million over the next decade, that consumers in each of these two areas would be paying about $275 million a year more.

(e) How can the agreements work? One might think that the simple arithmetic of such a system would give exporters all the motivation they need to meet the conditions of an effective agreement. These conditions are: (1) national export quotas, assigned by international agreement, aimed at limiting world supply, thereby raising prices to target levels; (2) domestic production control systems, aimed at limiting national output, thereby reducing the pressure of unsold stocks on the market; (3) adherence of all major exporters and importers to the agreement; (4) common national pricing and subsidy systems that establish relatively low farm prices for the export crop (either by setting up an export tax, or requiring deliveries to a national marketing board); and that also pay farmers a subsidy for producing other crops, particularly for domestic markets.

In fact, many of the less developed countries would now be reluctant to sign such agreements, and unlikely to adhere to them once signed. Other nations might well have to wage a propaganda campaign to explain the need for such restrictive conditions.

There are a number of good reasons for this reluctance. First, countries that produce only a small proportion of world output have an economic incentive to avoid tight controls. They can increase their exports sharply without affecting world prices. Unfortunately, if many small producers behave this way, prices will fall (although total revenue of small producers may rise); but it is not easy to demonstrate by argument the connection between increased exports and lower revenues. Second, for domestic political reasons, exporting countries may find it difficult to accept reductions in export quotas; while production controls may require an administrative structure beyond the present capacity of many countries. Third, it may also be difficult to maintain and administer a system of high export prices and relatively low farm prices, although some countries (Ghana, Brazil) have established marketing boards with this function. Fourth-and not to be taken lightly-exporters remember that until the mid- fifties, high prices prevailed without this complex control apparatus. They hope for a return to high prices without the dreary concomitant of controls. The recent breakdown of negotiations for an international cocoa agreement probably reflects in part producers' optimism, generated by a recent upturn in prices.

Ultimately, it is up to the exporters to face and solve-with importers' coöperation-the problems of making agreements effective. If they are reluctant or unable, prices will probably remain low or drop further over the next decade. The learning process may be slow and the price may well include the breakdown of initial agreements, as exporters savor the costly merits of rugged individualism. We should not deceive ourselves into believing that persuasion will be easy; by the same token, it would be self- deception to assume that free-market forces supplemented by more foreign aid will somehow take care of it all.

The International Coffee Agreement negotiated in September 1962, and now ratified by the participating governments, is a case in point. It offers an opportunity to test the effectiveness of an international commodity agreement aimed at restricting the output and maintaining the price of tropical crops. The price objectives set forth in the agreement are more modest than those discussed in this article. The agreement speaks of "equitable prices" which will bring about long-term equilibrium between production and consumption and "increasing the purchasing power of coffee- exporting countries by keeping prices at equitable levels." The quotas set for the first year are apparently aimed at maintaining prices at the 1962 average level. In view of the vast burden of stocks-nearly two years' supply at current consumption levels-this may be as much as it is feasible to expect immediately.

The coffee agreement includes at least in embryo the elements of a control mechanism that would be required, including a system of export quotas, penalty provisions for countries that do not comply with export quotas and production controls; and it makes a gesture toward programs of agricultural diversification. But the prospects for using it as a device for progressively raising coffee prices are not favorable. Higher prices will require production cutbacks in Brazil and Colombia and no increase in production in other producing areas. Brazil is embarking on a program of production cutbacks which includes rooting up coffee trees. It is still too early to say whether this can be done on the required scale.

The principal obstacle in the way of higher coffee prices lies in the reaction of smaller producers, notably in Central America and Africa. Under the provisions of the Coffee Agreement, countries that produce more than their export quota will have to store the coffee; if they persistently produce more than their export quotas plus domestic consumption, they will be penalized by not sharing in future quota increases. But a number of the Central American and African producers have no established system for storing surplus production and some governments may have only a limited ability to control farmers' production decisions.

Naturally it is always possible through devices such as export taxes or subsidies for planting new crops to transfer land out of coffee production. However, such policies may often raise administrative or political difficulties that are not easy to solve. The temptation may be very strong for countries that are producing more than their quotas to export the surplus in violation of the agreement. The Coffee Agreement allows some room for this temptation to be met legally by establishing so-called "new markets" in countries where coffee consumption is low, such as Africa, Asia or the Soviet bloc. Presumably coffee will be exported to these countries at a much lower price than in the quota market. However, it is far from sure that the new market will, in fact, be able to absorb potential surplus production.

Production control schemes are unlikely to work perfectly-the tree crop response is slow, and effects of weather cannot be provided for. Therefore, there is a prima jade case for buffer stock schemes to help maintain prices at target levels. In the case of coffee, it is difficult to see how an international stock could be established unless the huge Brazilian and Colombian reserves could be eliminated. One possible solution would be to destroy sub-standard coffee and to require producing countries to contribute most of their exportable reserves to the buffer stock.

In these circumstances, it becomes quite important for the governments of the importing countries to work particularly closely with the smaller exporters to devise methods that will result in keeping production and exports at the agreed levels through systems of disincentive taxes and incentive payments for diversification, if necessary. Otherwise, there is a likelihood that the agreement will break down under the pressure of excess supplies.

This, then, is the outline of a feasible system of commodity agreements: one that could under "ideal" circumstances have a large economic impact on a half-dozen countries; a more modest effect on perhaps 25 more; and virtually none on perhaps twice as many. As our discussion of the Coffee Agreement indicates, such agreements would be difficult to administer; they would not help the majority of less developed countries, and even the countries that would benefit could do so only within the sharp limits imposed by possible substitution of other commodities or synthetic products. It would be clearly unrealistic to treat commodity agreements as a sovereign remedy for trade and development problems. None the less, the effort to raise systematically the prices of four or five commodities is a useful interim measure. There may be compelling political, as well as economic, grounds for making the attempt.

[i] Food and Agriculture Organization, Agricultural Commodities-Projections for 1970, Rome, May 1962; U.N. Economic and Social Council, "Prospective Demand for Non-Agricultural Commodities: Problems of Definition and Projection Methodology." New York: U.N., May 1962.

[ii] William Butler, "Trade and the Less Developed Areas," Foreign Affairs, January 1963, p. 372-383; Jan Tinbergen, "Shaping the World Economy." New York: 20th Century Fund, 1963.

[iii] E.E.C. tariff preferences for tropical crops from associated territories, at their present levels, constitute more of an annoyance to free trade than a barrier. The real problem of E.E.C. preferences is that they will include quantitative restrictions on products from other countries.

[iv] This last statement makes two tacit assumptions: (1) none of the price rises can be diverted into government hands for diversification and development; (2) commodity agreements do not allow importers to influence exporters' economic policies. Both assumptions are debatable, as the operations of West African marketing boards (which pay farmers a fixed price for the crop, and use part of the profits for economic development), and the provisions of the International Coffee Agreement (specifying regular review of export quotas) suggest, respectively.

[v] A sub-group of this class is the so-called temperate agricultural products-grains, meats, wool. These crops are exported almost exclusively by developed areas but are also important to a few underdeveloped countries (e.g. Argentina, meats and grains; Uruguay, wool). Agreements for these products would primarily benefit a few developed countries at the expense of all other importers. This is clearly a case where direct aid to exporters is preferable to commodity agreements as a device for raising foreign-exchange earnings.

[vi] These estimates for demand growth are taken from the Food and Agriculture Organization projections for 1970. In preparing the foregoing table, it has been assumed that each country's share of the world market remains constant as of 1961.