CFC Support for LDCs

A few numbers

Total number of projects involving LDC since BPoA: 127
Total value of projects involving LDC since BPoA: USD 189mln
Total direct contribution from the CFC: USD 105mln
In implementing its measures under BPoA the CFC supported commodity dimension in programmes of practically all international agencies, including UNCTAD, UNDP, UNIDO, FAO, IFAD, UNFCCD, World Bank, ITC, etc.

The significance of commodity sectors for LDCs.

Commodity dependence is prevalent among LDCs today. A conservative estimate is that over 3/4 of African LDCs depend on commodity production for over half of their export earnings, and there’s some 800 million people at the lowest income level who depend on commodities and commodity-related jobs for their livelihood. UNCTAD is maintaining a close watch on the data, and could probably give you more details on the subject.

We see two-way connection between commodity dependence and poor development outcomes:

  • commodity dependence is a major source of economic vulnerability of LDCs;
  • commodity dependence is a symptom of lack of competitiveness in other sectors.

Closing the vicious circle, elevated vulnerability resulting from commodity dependence limits LDCs capacity for wealth accumulation, investment and productivity driven economic growth.
Graduation from LDC category is all but impossible without solving the problem of commodity related vulnerability.

CFC work in LDCs

CFC finances projects addressing specific weaknesses of commodity dependent developing countries, with particular focus on LDCs. Interventions can be aimed at any stages of commodity value chain, including, inter alia, productivity and quality improvements, various price risk management systems, marketing and marketability of commodity products, etc.

The main benefits of pilot projects supported by the CFC come not from “flooding a problem with money” but from making strategic interventions through modest expenditure to put together effective measures to address particular problems affecting commodity production and marketing. This way, the CFC seeks to create new opportunities for income generation and wealth accumulation in Least Developed Countries.

Seizing the opportunities created by commodity markets stimulates sustainable economic growth through emergence and development of profitable enterprises. Recognizing that problems of commodity dependence, volatility, and other complicating features of commodity markets also create development opportunities for LDCs should, in our view, remain part of the next decennial Programme of Action for LDCs.

Supporting UNLDC IV

CFC in collaboration with the International Coffee Organization and the LDC Division of UNCTAD sponsored a side event at the 4th UN LDC Conference in Istanbul in May 2011.
The conference focussed on learning from the experiece of coping with the financial and economic crisis in commodity dependent LDCs.

UNLDC IV CFC-UNCTAD Flyer UNLDC IV CFC-MD Statement UNLDC IV CFC-Outcomes UNLDC IV Programme of Action

Learning from the crisis

The volatility of commodity prices in the recent years had been a tough test for LDC resilience, and the main lesson that we need to learn is that it only exposed vulnerability that was already there as the result of commodity dependence. Addressing vulnerability is a matter of long-term structural economic transformation, and it cannot be replaced by short-term emergency measures. The need of to provide billions of dollars in emergency hunger relief aid in response to variations in the global market indicates that the structure of productivity growth in agriculture achieved in LDCs had not been sustainable and lacked resilience to adverse market conditions.

The case studies prepared for the side event provide factual material on the experience of six countries in dealing with the crisis; particularly, how effective their domestic policies have been in mitigating the adverse impact of the crisis.
Among the policy lessons for this weakness, the studies to be considered at the side event indicate:

  • the need to balance dependence on imported inputs against the capacity to export;
  • greater emphasis on “tropicalization of tropical agriculture”, i.e. improvement of productivity of robust tropical production systems, instead of importation of finely tines productive systems from temperate climates;
  • strengthening the reliance on domestic and regional markets for “non-traded commodities” to reduce exposure to international market pressures;

As well as many other insights.
Enhancing Food Security through Agricultural Development, by Thomas Lines;
The case of Burundi, by Dr. Jean Ndimubandi, University of Burundi.

Examining behaviour of commodity markets

A few words will be said in the side event about the fundamental changes in behaviour of commodity markets, and approaches of international community to minimising the socioeconomic costs of market inefficiencies.
The expanding use of commodity derivatives as investment assets by investors taking no interest in physical commodity value chains, “assetization” of commodities, is a significant phenomenon changing the nature and information content of commodity prices. The weight of money in financing markets, and positive feedbacks created, inter alia, by market liquidity effects, allow commodity derivative prices to deviate significantly, and for extended periods of time, from their “rational” levels, i.e. the levels conducive to sustainable global economic development.
Furthermore, in the short term, the financial markets have the potency to amplify price disruptions caused by unexpected developments in physical markets. This added volatility redistributes the costs in commodity value chains, to the detriment of the poor primary commodity producers. As expressed in the conference on the subject, sponsored by the CFC in December 2010, “the excess volatility of commodity markets blunts supply response” and reduces market efficiency. For the reasons of time, the detailed study on the subject will not be presented in the side event, but is included in the electronic set of documents that will be available at the side event.

The need for consistent response by development community

A question recently posed to the CFC by commodity sector specialists, summarises as follows:
Does the current increased interest in commodities reflect better understanding of the role of commodities in development, or is it yet another episode of the international spotlight touching commodities in passing, as the result of recent crises, market volatility, and generally high level of commodity prices?

International communitiy needs to use the development resources wisely, in the interest of long term development, and avoiding what is occasionally referred to in academic circles as “procyclical aid” phenomenon. In the light of our understanding of commodity related vulnerability we would like to argue for consistent use of development resources to promote structural development of commodity dependent LDCs reducing their vulnerability, and building their capacity for industrial development from their natural capital base in commodities.

Massive relief aid efforts should not obscure the need for such consistency in applying our understanding of the opportunities and challenges that come with commodity endowment.

Need for innovation in search for effective ways to promote development of LDCs

Most of the instruments at the disposal of international community today, could already be found in the Integrated Programme for Commodities some 40 years ago. As commodity markets and global economy change, so should our approaches to international development cooperation.

In our 20+ years experience of operations, we know that greatest results come from activities which are specific to conditions of a niche in the commodity sector, which has been identified by actual commodity sector stakeholders. Ideas for such interventions most often come as a surprise, and frequently do not fit in the mainstream development fashion. Yet, these innovations can be tested with very little financial support, and generate massive positive impact through replication of success.

Commodity markets are highly competitive, and change constantly. Effective interventions cannot come from repeating well known models time and again; innovation is required, and the international community would do well to create conditions for innovation and replication of success.

Unlike emergency relief measures, such innovation is affordable. By analysing the experiences of six LDCs in dealing with the crisis, we will find more opportunities for innovation in finding effective support measures for LDCs.