Dimensions and causes of long-term decrease in prices of primary commodities in the world market

Abstract

In the distant past prices of primary commodities had shown a tendency of decrease and their increase was recorded only during the First and Second World Wars. Since 1950s there had been recorded a slight decrease in global price indices of primary commodities, while in early 1970s they grew to a considerable extent. After that and up to 2001 the global nominal price indices and particularly real price indices of non-energy primary products drastically fell reaching the lowest level in their history. This applied to prices of all primary commodities as a whole as well as to all groupings of these products. On the other hand, prices of industrial products exported by developed countries to underdeveloped and medium-developed ones, dynamically grew in the second half of the previous century. Thus, the terms of trade substantially aggravated for underdeveloped countries whose exports structure is still dominated by non-energy primary commodities. Therefore, the negative correlation was clearly manifested between a very high share of primary commodities in the structure of commodity exports and a very low per capita income in a number of developing countries. The drastic fall in prices of primary commodities and the simultaneous dynamic growth in prices of industrial products caused to a great extent reduction of the share of primary commodities in the world commodity trade - from 57 per cent recorded in 1950 to only over 20 per cent recorded in late 20th and early 21st centuries. Among numerous factors that have brought about a drastic fall in prices of primary commodities the most prominent are: technical and technological progress in their production, production of their substitutes, in traffic and other sectors as well. Apart from this, the decrease in prices of primary commodities has been considerably caused by change in exchange rate at par to US dollar, agricultural policies of developed countries, privatisation of companies that produce commodities and particularly by too excessive production and purchase in relation to demand and spending that in recent years have been under the impact of recession that has emerged in developed economies and a number of newly industrialised and developing countries, as well as a very slow revival of economies in transition. By all this, a drastic fall in prices of a number of particular products from this group has also resulted from the impact exerted by some specific factors. Taking into consideration the fact that the impact of the most important factors that have brought about the drastic fall in prices of primary commodities is of permanent character and that it will be exerted to a greater or lesser extent in the next dozen of years the experts of the World Bank forecasted in late 2002 that, taken as a whole, the real prices of primary commodities would slightly increase by 2015, but they would still be at a lower level than in 1990. By all this, they forecasted that the real prices of energy commodities (this also including raw oil) would be considerably reduced in that period.