老 a model of the world copper market

ResourcesandEnergy7(1985)377-394.North-HollandCOMMODITYMARKETSTABILIZATION-ACOMPARISONOFSIMPLEANDOPTIMALINTERVENTIONSTRATEGIESINAMODELOFTHEWORLDCOPPERMARKETS.GHOSHandC.L.GILBERTUniversityofOxford,Oxford,OXI250,UKA.J.HUGHESHALLETTErasmusUniversity,3000DRRotterdam,TheNetherlandsReceivedSeptember1984,finalversionreceivedApril1985WiththepublicationoftheBrandtreportandtheCancun‘North-South’summitmeeting,internationalcommoditypolicyhasagainbecomeanimportantissue.Commoditystabilisationagreementshavebeenproposedasameansofstabilisingproducers’incomesand/orredistri-butingwealthtolessdevelopedeconomies.Thispaperexamines,inthecontextofasinglemarket,theextenttowhichpricescanbestabilised,thepotentialcostsofsuchscheme,andwhetherthisredistributionwouldbeachieved.Bycomparingthebandwidthruleswhichhavebeenproposedwithoptimalstabilisationrules,wefindthatsignificantstabilisationispossiblebutexpensiveandthatbandwidthrulesarelikelytoproveinadequatebecausetheycannotanticipate.1.IntroductionForadecadetherehasbeenpressure,particularlywithinUNCTAD,tosetupstabilisationagreementsforthemajorcommodities.Butissuessuchasthedesirabilityandthebestmethodofinterveninginthesemarketsraisesharpdisagreements,asshownbytheoppositepositionstakenbytheBrandtcommissionandtheReaganadministrationorbydifferentcommodityproducersinthethirdwor1d.lThepurposeofthispaper,istoask:whatisthebestformofinterventionruleforstabilisingadynamiccommoditymarket,andtowhatextentareconventionalbufferstockschemescomparablewithanoptimalscheme?Theinstrumentsavailabletoacommoditypricestabilisationagencywillgenerallybesupplymanagementandbufferstockintervention.Theformershouldperhapsbereservedforexceptionalcircumstances,sincethepracticaldifficultiesofcontrol,particularlyinabuoyantmarket,areconsiderable.Itis‘Disagreementswhichwerehighlightedbythe1981‘North-South’summitatCancun[seeGoldstein(1982)].0165-0572/85/$3.3001985,ElsevierSciencePublishersB.V.(North-Holland)378S.Ghoshetal.,Commoditymarketstabilisationmoredifficulttocommandproductionataleveldifferentfromthatforth-comingatpricesonthefreemarketthantodothereverse.Forthesereasonsthecurrentroundofcommoditystabilisationdiscussionsenvisagesinterven-tiontobepredominantlythroughbufferstockinterventions.Itisatleastcertainthatproducers’andconsumers’welfarecanberaisedinthisway[Turnovsky(1978)].Mostacademicworkmakesthecaseforinterventionusingwelfaremeasuresderivedfromeconomicsurplus.Thisisasomewhatabstractmeasure,anditisoftenarguedthatproducersinlessdevelopedeconomieswouldfailtorecogniseincreasesinitasgenuinegains.Theyaremoreconcernedwithprices,earnings,anddevelopmentfunds.Intheparallelpoliticaldebate,commodityproducersandUNCTADtendtoarguethatpricevolatilityconstitutesaprimafaciecaseforstabilisation[UNCTAD(1976)];aviewsometimesechoedinthedevelopedworld[Brandt(1980)].Butitisstillnotclearwhatmaybeexpectedfromsuchstabilisationagreements,norhowtheyshouldoperateitipractice.ThemainUNCTADproposal(the1976IntegratedProgrammeforCommodities)nevermadeclearwhetherstabilisedprices,orimprovementsinthetermsoftradewastobethemeanstoredistributewealthbetween‘North’and‘South’.Thisambiguityisevidentfrom[Brandtandco-workers(1980)],‘Commoditypricesshouldbestabilisedataremunerativeleveltobecomelessvulnerabletomarketfluctuations’,andsimilarstatementsinmanyUNCTADdocuments.Therehasbeennoclearviewonwhatinterventionschemesarebest,noronwhetherinterveningcouldachievethedesiredgoalsandatacceptablefinancialcosts.Asaresultnegotiationsforsettingupstabilisationagreementshavenotbeennotablysuccessful.Wehavechosentoinvestigatecopperasaprimecandidateforastockpilingagreement.Itjsoneofthe10‘corecommodities’proposedbyUNCTAD,beingbothparticularlysuitedtostockpilingandoneofthemostimportantcommoditiesinworldmarkets.Thefreemarket(LondonMetalExchange)price,atwhichthebulkofmetaloutsidetheUSAandthecom-munistblockexchanges,isnotoriouslyvolatile.Themetalissubstantiallyproducedindevelopingcountries,andformanyofthem(Zambia,Zaire,ChileandPapuaNewGuinea)itcontributesover50percentofexportearnings.BothUNCTADandCIPEC2havepressedforamarketingsystemthatisbothlessuncertainandmorefavourabletodevelopingcountryproducers.Theplanofthispaperisasfollows:insect&n2weconsiderthegeneralstructureofcommoditymarketmodels;section3outlineshowbandwidthinterventionschemeswork;section4outlinestheinterventionrulestobe‘ConseilIntergouvernementaldesPaysExporteursdeCuivre.S.Ghoshetal.,Commoditymarketstabilisation379considered;section5setsoutthecostandbenefitmeasuresofstabilisationfordiscriminatingbetweenschemes;sections6and7giveournumericalresultsforbandwidthandoptimalinterventionsrespectively.2.ThestructureofcommoditymarketmodelsThemainvariableofinterestinanycommoditymarketmodelisthepriceatwhichthecommodityisexchanged.Modelsofcommoditymarketsthereforehaveaparticularlysimplestructurereflectingthedeterminationofpricethroughthefamiliar‘Marshalliancross’:A&=Q,-C,,whereQ,isproduction,C,consumption,andS,stockholdingsinperiodt.HereP,isthemarketprice;P,isavectorofexpectations,formedatt,ofpricesuptosomespecifiedhorizon;andX,isavect