Can Commodity Price Stabilisation Yield Macroeconomic Benefits?

Commodity price stabilisation schemes have always been an important item on the international economic policy agenda. One of the most famous schemes was designed by Keynes in 1942, as a companion to his International Clearing Union (which later became the IMF). He proposed "Commod Control", an agency charged with stabilising commodity prices. Keynes' arguments for such an agency (in a series of wartime memoranda) met with considerable political opposition and had to be shelved. More recently, the same fate has befallen UNCTAD's attempts to establish "Commod Control" through their Integral Program for Commodities.

In a recent CEPR Discussion Pape,r Research Fellows Ravi Kanbur and David Vines analyse the Keynesian case for international commodity price stabilisation schemes. David Newbery and Joseph Stiglitz have recently suggested that the case for such buffer stock schemes is weak - they argue that the benefits are small relative to costs, that they are unevenly distributed, and in any case alternative methods can achieve the same benefits. But as Kanbur has stressed elsewhere ("How to analyse commodity price stabilisation?" forthcoming in Oxford Economic Papers), the Newbery-Stiglitz analysis focuses primarily on the microeconomic benefits from stabilisation - the gains from reduction of risk in income for producers and prices for consumers. On the other hand, Keynes and his followers, notably Nicholas Kaldor, have always emphasised the macroeconomic benefits from stabilisation. They maintain that fluctuating commodity prices impart an inflationary bias to the consuming nations, as a result of which their governments are forced to follow more deflationary policies than they might otherwise wish. The benefits from commodity price stabilisation are thus primarily gains in the inflation and output objectives.

To analyse this Keynesian case, Kanbur and Vines develop a simple model of interaction between the industrial region of the world (the "North") and the primary commodities producing region of the world (the "South"). It incorporates the particular structural features of the world economy which impinge on the analysis of international commodity price stabilisation schemes. In years when commodities are in plentiful supply, their price - and hence the purchasing power of the South - drops. The output of the North declines, since the South buys less industrial goods. But when commodities are in short supply, any rise in their price tends, because of real wage resistance in industrial countries, to perpetuate an upward inflationary spiral, which leads the governments of these countries to curtail aggregate demand and hence economic activity. There is thus an inherently deflationary bias in the model analysed by Kanbur and Vines. The "buffer stock" scheme they discuss acts to offset this deflationary bias. Welfare gains result because there is no longer a need for fiscal contraction in the industrial countries.

Kanbur and Vines also investigate whether a different fiscal policy in the North might achieve the same benefits as commodity price stabilization. Suppose there are fluctuations in the Southern harvest. Then in the Kanbur and Vines model, fiscal policy could achieve the same average real income for the North as "Commod Control", but "Commod Control" would yield a smaller variance of real income than would fiscal policy.

Kanbur and Vines note that their analysis does not address the operational difficulties of "Commod Control", nor the effect of such stabilization on the growth of the world economy. These remain issues to be explored in future work.

North-South Interaction and Commod Control
S M R Kanbur and D Vines

Discussion Paper no. 8, March 1984 (IT)