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Commodity markets, economic growth and development In a recently published report, FAO and UNCTAD studied the linkages between commodity markets and economic growth and development by highlighting the different transmission channels through which commodity prices impact the economy. The report can be accessed here: http://www.fao.org/3/a-i7937e.pdf

The commodities sector is very important for the economy of developing countries. More than 100 developing countries depend on primary commodities, and particularly agricultural commodities, for their export earnings. For these countries, developments in world markets impact on their economic growth and development, as well as food security, the incomes of family farmers and the rural sector in general. For instance, the secular decline of primary commodity prices together with sudden unpredictable surges present significant challenges for commodity-dependent developing countries (CDDCs). Furthermore, many of these countries are also net importers of food, and hence buyers as well as sellers on world markets, which makes them more vulnerable to sudden variations in commodity prices.

The effects of commodity dependence on human development are mediated through numerous direct and indirect channels that link global commodity markets with domestic economic, social and human development conditions. Understanding these links and how they affect development objectives is important to inform policy-making processes. The transmission channels of commodity dependence can be broadly grouped into three areas according to their point of entry into the domestic economy. First, there are impacts that emanate from the terms of trade. Second, commodity dependence presents fiscal and monetary policy challenges; and third, developments on international commodity markets can affect consumers and producers at the micro level.

The role of agricultural commodity prices is fundamental for sustainable development, especially for those countries that depend on agricultural exports and/or in which agriculture is a large sector of the economy. Prices and price movements have an important role in determining incentives for the allocation of resources and investment as well as implications for income distribution, especially in countries with large agricultural sectors. Abrupt and unexpected changes in agricultural commodity prices can have major long-term consequences and require close attention by all concerned stakeholders.

Although the price levels in global agricultural markets are still higher than those that prevailed in the 1990s, the long-term declining trend in agricultural prices may have serious policy implications for agricultural development efforts, especially in the context of the 2030 Agenda for Sustainable Development. In this environment, policy makers find themselves in search of the appropriate policy mix to accomplish the multiple objectives of sustainable development. The long-term trend behaviour of agricultural prices and the periodic price surges have a determining effect on agricultural development, on the transformation of the rural economy, on trade and, for many countries, on broader economic growth. This calls for institutions that could respond to different market price environments and policies that can provide coordinated stimuli to the sector. Agriculture, with its links to food security and nutrition, health, education, rural development and the environment relates to many Sustainable Development Goals (SDGs).

Productivity growth that protects natural resources should drive the efforts towards the achievement of the SDGs. Prices shape the environment in which investments and technology and its adoption promote productivity growth sustainably. High food prices can stimulate investment from the private sector and farmers themselves, while in an environment of low prices the role of government in facilitating investment as well as research and extension services becomes even more central. This is also true for policies that promote technologies for productivity growth and that facilitate integration into markets, especially in sectors characterized by small family farmers.

Agricultural prices also shape trade and thus can have significant effects on export revenues and the balance of payments for those countries that depend on commodity exports. Trade policies are crucial in maintaining appropriate price incentives to ensure sustainable productivity growth. Excessive price volatility blunts investment, as it increases risk and makes the provision of agricultural insurance necessary. Social protection mechanisms have been very effective in lifting the poor from hunger during periods of high prices. They are also very relevant in periods of low prices and can facilitate investment, if well-targeted to poor small producers and family farmers. 

It is clear that without profound policy changes, developing countries, and especially those that depended on commodities, will lag behind in their development efforts. The challenge for these countries is to strengthen and expand the linkages of the commodities sector with the other sectors of the economy in a manner that promotes inclusive growth. Sound policies that are necessary to enhance the commodity sector’s contribution to inclusive growth include promoting value addition and embracing policy measures that enhance development linkages. Enhancing market transparency − particularly in local commodity pricing − and promoting the inclusion of commodity producers in the decision-making process are policy options that can bring widespread benefits and foster inclusive growth and development. Adding value to primary commodities through value chain development is an additional avenue for diversifying the economy. Furthermore, investments need to be boosted, especially in infrastructure development, in education and health, and in social protection programmes. Economic growth is a necessary but insufficient condition for reducing poverty and inequality. Governments need social protection policies and measures that target the poor and enable them to participate in and benefit from the economic growth and structural transformation processes.

Pulses, what role can they play and how?

No doubt that pulses can effectively contribute to the realization of the 2030 Agenda for Sustainable Development and achievement of the SDGs, which focus on the three dimensions of sustainability – economic, social and environmental.

Pulses have characteristics that are at the heart of Agenda 2030. They foster sustainable agriculture and contribute to climate change mitigation and adaptation; are economically accessible and contribute to food security at all levels; are highly nutritious and have important health benefits (rich in proteins, energy, dietary fibre, micronutrients such as vitamin B, and a variety of anti-oxidants); and they also promote biodiversity. Pulse crops are cultivated extensively by smallholders and subsistence farmers in developing countries. They are important for household food security and for generating income as cash crops.

Recognizing their importance and potential role for food security and better nutrition, for agricultural systems and for sustainability, in 2013, the United Nation General Assembly declared 2016 as the International Year of Pulses (IYP 2016).

However, and despite all this, pulses have remained as secondary crops and have not been given by governments the place that is commensurate with their benefits. It is hoped that the IYP would lead to a better recognition of the important role that pulses can play in fighting hunger and malnutrition and improving agricultural systems, and thus in contributing to a more equal and inclusive sustainable development. Many actions are required in this regard.

Increasing production and reducing the yield gap for pulses is the primary challenge especially in countries where pulses are a significant sector. Renewed efforts are needed to disseminate high yielding varieties to producers, especially to the majority who are small-scale producers. Initiating a positive shift in the supply of pulses also calls for lifting the many barriers to innovation – especially the under-investment in agricultural research and development by both the public and private sectors.

Sensitizing consumers to the nutritional benefits of pulses also remains a challenge in some parts of the world, especially where consumption growth is either stagnating or where it has stalled. Raising awareness of the nutritional value of pulses can help consumers adopt healthier diets. Where animal-based foodstuffs dominate protein intake, the promotion of pulses can be an integral way to ensure that diets remain balanced and to circumvent increases in non-communicable diseases. This applies not only to developed countries, but also in countries that are undergoing dietary transition and rising incomes.

More and better investments are also required along the entire value chain of pulses to reduce input requirements, improve production systems and storage, and reduce post-harvest losses. There is also a need for increased investment in the processing sector to develop the value addition industry and in marketing systems to expand markets for pulses. This should be complemented by targeted social protection programmes to ensure inclusiveness and that the benefits are shared by the small and poor.