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CATEGORIES OF INCOME DISTRIBUTION IN PRIMARY COMMODITIES EXPORTED BY DEVELOPING COUNTRİ- ES: SOME CONCEPTUAL AND METHODOLOGICAL PROBLEMS Korkut BORATAV I. THE FRAMEWORK The problem of primary commodities, as related vvith international trade, vvas, at times, the majör issue vvhich predominated international forea on the so-called New International Economic Order (NIEO) in the second half of the 1970s. As the NIEO controversy developed away from a confrontational route into a time -consuming bargaining process, certain potentially explosive demands of the Third World on commodities receded into the background, and the vvhole set of problems vvas reduced into the ways and means of securing price stability for a number of commodities, vvith a Common Fund as the institutional framevvork to realise this objeetive. The year 1979 witnessed the agreement on the essential features of the Common Fund. The compromise formula on the Fund reached in Geneva in 1979 is far from vvhat vvas originally envisaged vvhen the idea vvas launehed four years ago. But, vvhatever the deficiencies of the Common Fund as it is emerging novv, the problem of price stability ought to be considered a erossedout item in the agenda of the North-South Dialogue , and other, and more fundamehtal problems of trade on primary commodities are likely to be dravvn into the bargaining process. One of these explosive problems is the more-or-less forgotten demand of the Third World countries on inereasing the participation of developing countries in the transport, marketing and distribution of their exports [of primary commodities] and their share in the earnings therefrom. 1 Policy proposals 1 Manila Declaration and Programme of Action of the Group of 77, Part Two, Section One, Paragraph 4 h. 1977] CATEGORıES OF ıncome DıSTRıBUTıON 29 which aim to increase the share of the earnings of developing countries from commodities exported by them should be based on an analysis of the share of developing countries in the final consumer price. 2 In other words, taking the final price of primary commodities in the terminal markets as the starting point, categories of income distribution ought to be defined and measured as a precondition of arriving at a clear understanding the problem at hand. It is significant that UNCTAD started working on these lines in the course of the preparations for the 1976 Nairobi Conference. 3 Since the Nairobi Conference pushed ali the commodity issues to the background except, naturally, price stability problems, and hence the Common Fund; a slowing-down of the studies concerning market structures was witnessed after But in the coming years, with the apparent elimination of the price stability issue, problems of improving the market structure of primary commodities with a view to in.creasing the share of the developing countries in the final price are likely to come to the fore. 5 If this proves to be the case, we are likely to witn.ess an 2 UNCTAD, Action on Commodities, Including Decisionson an Integrated Programme in the Light of the Need for Change in the World Commodity Economy (TD /184), Paragraph Rappoı t existant entre les prix â l'exportation et les prix â la consommatioıı de certains produits de base exportes par les pays en developpement (TD / i 84/ Supp. 3); Relations entre les prix du minerai de fer et ceux de l'acier (TD / B/ C.l / 142); Marketing and Distribution System for Cocoa (TD / B/C. 1 /164); Marketing and Distribution Systems for Hides, Skins, Leather and Leather Footvvear (TD / B / C. 1 / 163). 4 The World Market for Manganese: Characteristics and Trends (TD / B / IPO / MANGANESE / 2); The World Market for Phosphates: Characteristics and Trends (TD / B / IPC / PHOSPHATES / 2); and, Marketing and Distribution of Tobacco (TD / B / C.l / 205). References to these studies in this paper in the following paragraphs vvill use their UNCTAD symbols only. 5 There remain only tvvo other areas of controversy: First, indexation, vvhich is more suitable for cartel-type action, and, hence, outside the effective agenda of North-South Dialogue.Second,the establishmeııt of a complementary financial facility for compensating commodity-specific export shortfalls of developing countries; an issue vvhich does not raise majör problems of structural reform, but vvhich is, nevertheless, the subject matter of a heated controversy on competence ete. betvveen IMF and UNCTAD. 30 THE TURKSH YEARBOOK VOL. XVıı increase in the nurnber of studies on market structure of commodities aiming at analysing processes of income distribution at the international level. The purpose of the present paper is to outline a conceptual and methodological framevvork in measuring categories of distribution for primary commodities exported mainly by developing countries. Elements of such an analysis exist in the abovementioned UNCTAD studies in which attempts were made to measure the differential between the prices paid by consumers in developed countries and prices received by (unit export values of) developing countries. 6 This paper intends to carry forward the methodology used in these studies, and make a number of corrections thereto, mainly in the follovving a) In measuring price margins, to start, not vvith the unit export value, but with the price received by producers; and to analyse the elements which accoıınt for the difference betvveen unit export value and price received by producers. b) To deduct unit production costs of the commodity in developing countries from the final price. In calculating production costs, material costs of production only, i.e. seeds, fertiüzers, insecticide, fuels, amortization of capital equipment ete. are to be taken into consideration. Wages, interest and rent, as far as they are aetual, paid-in elements are treated not as production costs, but as categories of net output; whereas implicit factor payments are altogether excluded. c) To deduct supplenıentary elements of value added, and specific costs therein, from the final price of the commodity, which necessitates: i.deduction of the necessary costs of transportation, handling and storage, both at national and international levels; and, ii. Deduction of ali elements of value-added (and specifie costs therein) in those commodities where further processes of transformation and production ta kes place before the commodity reaches the consumer. After these deduetions and corrections, the final price of the commodity represents the net output created by the producers of the commodity in the developing country. An. analysis of dist- 6 Seein particular TD / 184/Supp. 3, passim;td/ B / C. / 205, pp ; TD/B/C. 1/164, pp 1977] CATEGORıES OF ıncome DıSTRıBUTıON 31 ribution is significant only if it establishes the shares received by various economic and social categories within the net output of any product. In. the case of commodities exported by developing countries, the relevant categories are: (a) The share of the producers of the developirıg country (to be denoted by V). It is not attempted to measure the categoıies of distıibution vvhich share betvveen themselves the part of the net output seemingly appropriated by the producers . Although the analysis vvould remain incomplete vvithout the inclusion of these elements, e mp rical difficulties seem to be surmountable at this stage. For illustrative purposes, the follovving elements of distribution vvhich actually make up the share of producers in our analysis can be cited: i. Net income of farmers (in the case of agricultural commodities produced under conditions of family farms or petty commodity production ) ii. Profıts net of interest and commercial margins (in the case of minerals or agricultuıal commodities produced under capitalist conditions or under state ovvnership) iii. Rents actually paid by farmers to landlords iv. Wages of agricultural or mine vvorkers v. interest paid by agricultural and mining enterprises and farmers to tne private moneylenders or to the banking system. b) Commercial profits within the exporting country (R ). İf data is available, (vvhich does not seem very likely) an should be made to differentiate betvveen: i. Commercial profits (or losses) accruing to state trading oıganisations of developing countries (phosphates, cocoa ete.) ii. Commercial profits accruing to private and local traders and exporters; iii. Commercial profits accruing to foreign (and multüıational) firms in the case vvhen these firms purehase directly from producers or vvhen they have investments in the produetive secter itself. c) Taxes and simiiar clıarges on the commodity collected by the government of the exporting country (T x ). 32 THE TURKISH YEARBOOK VOL. XVıı The f.o.b. unit export value, minus unit production costs, and minus the necessary unit transport and storage costs betvveen the production and export centers, is equal to the sura of (V), (R x ) and (T x ) cited above respectively in sub-paragraphs (a), (b), and (c). d) Commercial profits within the developed country (R m ). Since industrial profits, together vvith the other elements of value added in case of further stages of production and processing are to be deducted from the final price, this item can be considered to represent the pure commercial margin of the distributive netvvork as a whole including vvholesale and ıetail profits, as wsll as profits emanating from international trade in commodities. Speculative gains, in cases vvhere futures markets and exchanges exist, are similarly to be included in this category. e) Tcrces and similar charges on the imported commodity collected by the government of the developed country (T m ). Thus, the final price of a commodity in a developed country (P f ), consists of unit material costs of production in the exporting country (C), plus, storage, handling, and national and international transportaion (F), plus, value-added in further stages of production (and specific costs therein), pıocessmg and transformation in importing countries (Y m ), and, plus, net output created by producers in the developing country (Y x ). To ıestate: P f = C + F + Y m + Y x : Y x = P f C F Y m (i) (ii) Net output consists of the five majör elements referredto above, namely: Y x = V + R x + T x +R, n + T m (iıi). vvhich provides us the basic categories of distribation relevaııt on commodities in international trade. Two composite and basic ratios of distribution can be obtained from relation (iii): a) Degree of exploitation of commodity-exporting country: S, = (R m + T m ) / (V + R x + T x ) (iv) 1977] CATEGORıES OF ıncome DSTRBUTON 33 b) Degree of exploitation of commodity producers 7 : S? =(R m + T m + R x + T x ) / (V) (v) With the necessary methodologıcal corrections it seems conceivable that available data on some commodities can, to some degree, be ııtiüsed to estabüsh the basic relation (iii) formulated iri the previous paragraph. Withoııt corrections and adjustments in these lines, inter-commodity comparisons using the share of unit export value in the final price of a commodity as an indicator of distıibution at the international leveî, as undertaken in previous UNCTAD work (e.g. TD,/184/Supp. 3), cannot be considered very significant. Thus, the fact that the share of unit export value of iron ore in the wholesale price of steel is 7 % in U.S.A. in 1973, whereas the corresponding ratio for cocoa powder is 40 % (Ibid,, Tables l and 7) does not convey m.uch information as far as relations of distribution are concerned. The difference between the two percehtages may conceivably be explaiııed by the mere fa,ct that steel production subjects iron ore into a complex process of further transformation with the use of a number of additional raw materials, energy, and sophisticated capital equipment and technology; whereas this is not true for cocoa powder. The elements of the basic relation (iii) above, are components of the final price in its corrected form, either in absolute values, or preferably, as shares, where we take Y x =100. It is a simple step forward to multiply al! the elements used in bııilding ııp eauation (iii) with the phvsical ouantities of the commodity in. its final form, ar.d, thus, to arrive at total valııe of net output and its components. İn some cases, data are more suitable to determine directly total values, instead of ıınit values (or prices). Both types of procedure are equally valid, and, in the final analysis, lead to the same result. 7 (V), as defineci above, may actually include a number of surplus elements. Profits, rents and interest vvhich are, of necessity inciuded under producers' income are such surplus elements. Therefore, the real degree of exploitation can be defined by iııcluding items (ii) and (iv) in the divideııd of the ratio defined in relation (v) above. This approach i nterpretes producers'income as the sum of vvages and net income of farmers only. But, it seems empirically impossible to make this correction at the present stage. 34 THE TURKISH YEARBOOK [VOL. xv n There are a number of theoretical and conceptual questions in using the above-mentioned ıııethodology, and in interpreting the results obtained from an empirical application of equations (iii), (iv) and (v). Some of these questions vvhich we shall pose novv, vvill be briefly dealt vvith in tht final section of this paper: (a) Are we jus'ified to exteııd the application of the proposed methodolcgy into products vvhere the process of transforming the ravv material involved takes a complex form, vvhere further production takes place vvith the use of additional commodities as inputs and under capital-and technologv-intensive processes? b) Hovv far are we justified to use relations (iv) and (v) above as exploitation ratios , particularly in cases of products vvith very lovv price elasticities of demand, monopolistic pricing practices and hign excise taxes, since the high price of the relevant pıoduct in these cas--s might include value created in, and transformed from, other sectors of the developed economy? c) Hovv far are vve justified to see this problem as a commodity-specific problem in vvhich exporters are developing countries? Should not the commodity-specific analysis be complemented by a symmetrical analysis in vvhich differentials betvveen the final prices of imported manufactured goods in developing countries and production and txport prices in developed countries are to be measured and translated into a similar scheme of distribution as that proposcd for primary commodities in this paper? II. ILLUSTRATIONS A Introductory Remarks An attempt vvill be made in the follovving paragraphş to provide tvvo illustrations on the empirical application of the framevvork outiined above. Bananas are taken as representing a commodity vvhich does not undergo any significant process of transformation after it is imported, vvhereas tobacco is considered as a typical commodity vvhich is subjected to further stages of processiııg and transformation in the im.porting country. 1977] CATEGORES OF ıncome DıSTRıBUTıON 35 Data provided by previous UNCTAD work on the two commodities will be used in the ülustrations below. For bananas, Table 10 a of TD / 184/ Supp. 3; reproduced as Table A in this paper, will provide the basic information, and for tobacco-cigarettes Table 22 in TD / B / C.l / 205. reproduced as Table B below will be used. Since the data in these tables are not presented in conformity with the requirements of the ccnceptual framevvork outlined in the previous section, a number of arbitrary, but intuitive and common-sense corrections and manipulations are freely made with the figures therein, particularly with the tobaccocigarettes data, which, in the form they are presented in Table B, are of little use for our purposes. Therefore, the final results should, in no case, be interpreted as reflecting the actual relations of distribution, but, rather, as examples merely aiming to demonstrate that calculations on the lines of the proposed methodology are feasible. B. Commodity Which Does not Undergo a Significant Process of Transtornıation in the Importing Country: Bananas For bananas. a reconstrııcted and corrected version of Table A is presented as Table I below. Average retail price for bananas is given as 327 dollars per tonne in the former Table, which is reproduced in Line 12 of Table T. (AH the follovving figures in this sub-section are to be understood as dollars.) Using the notation of Par. 3 above, P f = 327. Unit costs of production. in the original Table A seem to inelude implicit factor payments vvhicb. leave practically no margin for producers, whereas the concept of production. costs outlined above excludes implicit factor payments and covers only the material costs of production. 20% of the gross revenue of producers (Lines 1-3 of Table A) is assumed to be equal to uniı production costs in this sense. Hence, C = 0.2 x 38 = 8 (Roundcd). (Line la of Table \). Necessarv unit costs of transportation and storage (F), can be divided into (a) those in the exportin.g country (Lines in Table A, Line 2 in Table I), (b) difference betvveen. c.i.f. and f.o.b. prices (Line 10 in Table A, Line 6 in Table I), and, (c) those in. the importing country (Lines in Table A, Line 8 in 36 THE TURKISH YEARBOOK VOL. XVıı TABLE A- BASIC INFORMATION ON PRINCIPAL ELEMENTS OF PRİCE AND COST IN THE WORLD BANANA ECONOMY, Cost and Revenue Item Unit Value per Tonne (Dollars) ]. Production costs Transport up to vvholesaler 3 3,Gross margin of producer Gross receipt of planters at delivery to wholesalers 38 4.Packing and storing 24 5.Transport up to port 4 ö.handling and loading 5 7.Export duties 2 8.Other taxes 6 9.Gross margin and overhead costs of exporters 6 l-10.f.o.b. price 85 lo.freight and insurance 38 l-10.c.i.f. price Unloading and handling at port of arrival Import duties Gross margin or commission of importers -0,3 l-13.importers'sale price Gross margin of storing houses Sale price at storing house Gross margin of retailers 104 (Including excise taxes) l-15.retail price 327 Source: Reproduced from Rapport existant entre les prix a I'exportation et les prix â la consommation de certains produits de base exportes par les pays en developpement , op. cit, Table 10 a. TABLE I- ELEMENTS OF PRİCE AND COST IN THE AND MARKETING OF BANANAS (Based on Table A) PRODUCTİON Unit Values per Tonne in Dollars 1. Gross revenue of banana producers of vvhich. 38 a)material costs of production (8) b) Net revenue of producerss (30) 2.Transportation, packing and storage in exporting country 33 3.Taxes and similar charges in exporting country 8 of which, a) Export duties (2) b) Other taxes (6) 4. Gross margin of exporters 6 5.F.o.b. price ( ) 85 ö.freight and insurance 38 7.C.i.f. price (5 + 6) Unloading, storage and transport in importing country 78 9.Import duties Excise taxes Commerical profits of importers and of the distributive network Retail price 327 1977] CATEGORES OF ıncome DıSTRBUTıON 37 Table 1), vvhich give the sum of F = 149. This sum seems to be an over-estimation of the necessary costs of transportation ete., particularly since the strueture of ovvnership and organisation of international shipping inevitably gives rise to elements of surplus, över and above the necessary costs, appropriated mostly by developed countries vvhich is implicit in the c.i.f. - f.o.b. price differential. But no correction is made for this factor. Since no further element of value-added is assumed to be existing for bananas, net output created by banana producers is equal to: Y x = P f C F (ii) Y x = =170 As for the distributive shares in net output, producers' income is eaual to: V = 38 8 =30, according to the assumption made above. (Line 1b of Table I) Commercial profits in the exporting country are taken to be represen
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