Schemes for the stabilization of primary commodity prices have always been an important item on the agenda of international policy discussions. This is because the prices of these commodities are volatile, and because exports of them are large sources of revenue for many countries, particularly those of the Third World. One of the most famous schemes was proposed by Keynes in 1942, as a companion to his International Clearing Union (which later became the IMF). Keynes’s argument for commodity price stabilization led to political opposition from those opposed to market intervention and had to be shelved. More recently the same fate has befallen the Integral Program for Commodities put forward by UNCTAD (the United Nations Conference on Trade and Development). Those schemes which exist have developed in a piecemeal fashion. ‘Only [schemes for] wheat, sugar, tea and coffee have lasted a number of years, and few appear to have achieved much before their demise’ (MacBean and Snowden 1981).
Price stabilization is usually put forward as a means of stabilizing the incomes of producers and consumers. It could also be used as a means of raising the average incomes of producers, but would then need to be buttressed by quota schemes to restrict production.
Price stabilization will normally succeed in stabilizing revenues to producers in the face of shifts in demand for commodities of the kind which occur because of the world business cycle. The managers of the scheme need to operate some kind of buffer stock. When demand is high, the extra can be satisfied by sales from the buffer stock: producers’ revenue is unaltered by the demand increase. The reverse is true when demand falls. Stabilization of prices will, it is true, allow fluctuations in producers’ incomes to remain in the face of fluctuations in the quantity produced, as a result, say, of changes in harvests. However, without stabilization of prices, producers’ incomes might be even more unstable, if good harvest produced very large falls in prices (and vice versa). Price stabilization will also isolate consumers of primary commodities from shocks to the purchasing power of their incomes in a wide variety of circumstances.
Economists differ in their assessment of the benefits to be obtained from such stabilization of prices. Newbery and Stiglitz (1981) have argued, in a powerful modern study, that the benefits to producers are small. Newbery and Stiglitz would clearly be correct if producers could adjust their spending in line with fluctuations in their income. However, they ignore the great hardships which could arise when primary commodity producers (both individuals and nations) have to make unexpected cuts in expenditures. Such hardships will indeed arise when average incomes are not much above subsistence or when the revenue from sales of primary commodities is used to pay for development projects which are hard to stop and start at will. Newbery and Stiglitz also argue that the potential benefits to consumers would be small. But they largely ignore the inflationary difficulties for consumers which primary-commodity-price instability creates, and it was those which concerned Keynes. It must be admitted that contemporary proponents of primary commodity price stabilization schemes have been slow to produce good evidence about the size of those effects which Newbery and Stiglitz ignore.
There are fundamental difficulties in the way of setting up any stabilization scheme. It is necessary to choose not only the price level at which stabilization is to take place, but also the optimum size for the buffer stock. An obvious candidate for the price level is one which would balance supply with demand, averaging over the normal fluctuations in both supply and demand. But the amount of information required accurately to determine this price would be formidable for most commodities. As for the buffer stock, it should presumably be able to deal with the normal fluctuations in supply and demand. But in order to avoid running absurdly large stocks the objective of complete price stabilization would need to be abandoned, at least in extreme circumstances. Even so, the cost of operating the required buffer stock might be very large for many commodities. It is thus easy to see why those stabilization schemes which have been established have always been on the verge of breaking down.
David Vines
University of Glasgow
References
MacBean, A.I. and Snowden, P.N. (1981) International Institutions in Trade and Finance, London.
Newbery, D.M.G. and Stiglitz, J.E. (1981) The Theory of Commodity Price Stabilization: A Study on the Economics of Risk, Oxford.
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