Smoothing Out the Wild Swings

In a world that is short of raw materials, the most incendiary global confrontation of the future may not be East v. West but South v. North. That is, the raw-materials-producing nations clustered in the world's southern hemisphere will try to align and squeeze higher prices out of the relatively rich industrial nations of the northern hemisphere. Already the two sides are squabbling over what to do about the wild swings in prices of such basic materials as copper, rubber and cocoa.

During the global boom from 1972 through early 1974, prices doubled and tripled for these and other commodities, fanning inflation in the U.S., Europe and Japan. Now prices have collapsed, largely because recession has cut world demand (see chart). The declines have helped slow the increase in living costs in most industrialized nations but have also reduced the export earnings of some developing countries. Many of their leaders are echoing the cry of Venezuela's President Carlos Andres Perez for a "new economic order" based on higher materials prices, and they are insisting that the subject be discussed, along with oil, at any international energy conference.

Painful Dilemma. These demands present the industrial nations with a painful dilemma. If they agree to price-stabilizing pacts that would reverse the decline, living costs are certain to rise further in the developed countries. If they do not and no world energy agreement is reached, then the oil cartel states, which are already contemplating another price rise, might retaliate in support of the commodity producers with a larger increase that could choke off recovery from world recession. There is also a danger that the commodity price slump and the industrial world's growing reluctance to pour money into countries where nationalization is a threat will reduce investment in raw materials production enough to leave supplies short when demand rises again, perhaps triggering a price explosion even worse than in the last boom.

The U.S. has lately laid out a middle course between these hazardous alternatives: it seeks to mollify the commodity producers without entering into any sweeping, inflationary price-guarantee agreements. Secretary of State Henry Kissinger has said that the U.S. will consider international commodity agreements "on a case-by-case basis" and has promised American support for a review of the International Monetary Fund's procedures for granting loans to raw-materials-producing nations when their export earnings plunge. The IMF may announce a relaxation of those rules at a meeting in Paris this week.

Nearly all industrial nations, meanwhile, have pledged to re-examine the entire raw materials issue at a series of international meetings this year, including a special U.N. session in September. British Prime Minister Harold Wilson advocates agreements to stabilize the prices of no fewer than eleven commodities, presumably figuring that such pacts would add less to Britain's import bills over the long run than further uncontrolled price swings.

No Accord. In sum, a consensus seems to be forming that something should be done to get the world off the price roller coaster. This does not mean, however, that anything will actually be done. So far, Kissinger has offered little more than a willingness to talk, and some deeply divisive issues must be overcome before any stabilization agreements can be reached. For one thing, the U.S., which produces 85% of its own raw materials, still believes that the free market balances supply and demand well enough so that stabilization pacts should only smooth out the wilder swings; but many developing countries favor scrapping the market mechanism altogether in favor of arbitrary price and production targets.

Above all, there is no accord on the gut issue of how high or how low prices should be stabilized under any new agreements. Many developing nations, for example, want to "index" raw materials prices to the trend of world prices for all kinds of goods as a method of transferring wealth from rich countries to poor lands. The U.S. and most other industrial nations fear that indexing would touch off a permanent runaway inflation that would hurt the whole world. For that matter, there is not even agreement within the Administration on how conciliatory U.S. policy should be. Kissinger has had little support from economic planners at the Treasury for his overtures to the producing nations.

Suspicions and resentments between industrialized and developing countries vastly complicate the economic problems; even some of the basic facts are in dispute. The New York Times recently reported that experts from both industrial and less-developed countries--from Algeria to New Zealand--have advised Secretary General Gamani Corea of the United Nations Conference on Trade and Development that there is no statistical proof that raw materials prices have failed to keep pace with the prices of manufactured goods over the past 25 years. The implication--unpalatable to the U.N.'s Third World majority--is that the industrial nations have not been ripping off the poor countries to the extent often charged. U.N. statisticians disavow the conclusion reached by the ten-member study group, which was headed by Harvard Professor Hendrik Houthakker, a former member of President Nixon's Council of Economic Advisers.

Assuming that some stabilization agreements can be reached, there remains the task of making them effective. In the past, such agreements--which usually rely on some international body to dictate export quotas designed to keep prices within a set range--have rarely succeeded. Even cartels have not worked for anyone but the oil producers. Copper prices, for example, have fallen 86-c- per pound in the past year to 54-c-, despite substantial production cutbacks by four large producers--Chile, Peru, Zambia and Zaire. To benefit from a sudden jump in coffee prices, Brazil and other growers ignored an international coffee pact more than a year ago; now that prices are down they want a new agreement.

Price Gyrations. Each commodity presents different problems to would-be price stabilizers. Some, like iron ore, are vulnerable to new sources of supply, and others, like copper, to the ready availability of cheaper substitutes like aluminum. Beyond that, the dizzying price gyrations of the past three years have been caused not only by supply-and-demand imbalances but also by the abandonment of fixed exchange rates for the world's currencies. Distrusting the value of paper money, especially the dollar and the pound, investors and speculators have poured as much as $100 billion into commodities and commodity futures since 1973, according to one U.N. estimate. Initially, their buying pushed prices up. Lately, speculators have been dumping their holdings, aggravating the commodity price decline. Monetary reform or even strengthening the dollar and pound lies far beyond the scope of any commodity price agreements.

One idea attracting increasing attention is to build up internationally financed and managed stockpiles of key commodities. In theory, buying for stockpiles would help keep producers' earnings up when prices are low, while selling warehoused materials during times of shortage would help keep prices from going through the roof. Already, UNCTAD is talking up an ambitious scheme to stockpile $10.7 billion worth of 18 food and industrial commodities.

Plans like UNCTAD's would mark a step away from the free market. They would require a network of agreements on the prices at which stockpile managers could buy and sell and the quantities of raw materials that nations could produce for the warehouse when no other buyers are in sight. All these agreements would restrict the movement of prices and production. Though UNCTAD's plans may be too grandiose to be realized soon, the stockpiling approach seems preferable to either rigid, arbitrary fixing of prices and production levels or the wild price swings that at different stages of the commodity cycle hurt consumers and producers alike.

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