Research Paper 2, November 2005

Remunerating Commodity Producers in Developing Countries: Regulating Concentration in Commodity Markets.

The past few decades have seen a huge surge in international trade that has affected developing countries as well as the world’s largest economies. However, while some countries have seen an associated increase in wealth, others seem to have been left behind. One of the key reasons for this seems to be that least developed countries have specialized in those parts of the production chain that do not generate large profits. Resource constraints have prevented developing country producers from participating in activities that require a large amount of investment. In commodity markets, these activities (such as processing and marketing) tend to be undertaken by large multinational companies based in developed countries. Due to their size, such companies have considerable market power as buyers, and can ensure that input prices remain low. This, coupled with the low responsiveness of demand to changes in income and price, has led to a long-term decline in the price of primary commodities. Hence, concerted measures must be taken to improve the welfare of rural farmers in the poorest countries in the world.

Policy measures may help to improve this situation by: (a) attempting to address the asymmetry in bargaining power between producers and their large vertically-integrated customers; and (b) assisting developing countries in diversifying into sectors where larger profits may be made.

At the national level, solutions might include: (a) implementing competition law according to the needs of developing countries (i.e. the protection of all powerless groups, including producers in commodity markets) so that claims related to buyer power can be addressed; (b) redesigning and improving the operation of producer groups (perhaps involving a role for State Trading Enterprises) in order to organize production and ensure compliance with quality and safety standards; (c) developing a comprehensive strategy such that the competition component in each type of government policy (industrial, trade, macroeconomic, etc) is focused towards overcoming the problems arising from concentration.

At the multilateral level, there are further possibilities: (a) any discussion of competition law at the international level should be framed according to the needs of developing countries and the development agenda and not in terms of market access; (b) international commodity agreements could be an alternative to the problem of asymmetry. However, it would be necessary to restructure their design and operation such that some of the shortcomings observed in the past are overcome; (c) there is an urgent need to keep pressing for a fair trade of the use of subsidies and tariff escalation in agricultural markets; (d) developing countries may find important support at the multilateral level to help them overcome problems of scarce resources and expertise.

At the regional level, suggestions include: (a) coordination of competition policy among smaller groups of countries; (b) cooperation to allow synergies which could contribute to solving the problem of the lack of resources faced by certain countries; (c) developing a regional competition law in order to increase developing countries’ leverage in negotiating cooperation agreements with antitrust authorities from large countries.

Download