If governments of developing countries continue to pander to global capitalist forces, running after imaginary foreign investments that are not there anyway, they will be vulnerable to the highest levels of internal unrest and destruction

Dr Manzur Ejaz

Rising commodity prices have left fragile developing economies neither here nor there. Developing countries pressured or advised by the World Bank, IMF and the US, opened their markets to attract foreign investments. For most of them, real foreign investments have remained illusive because it was a zero sum game to start with. However, global speculative capitalist forces, unhindered by national restrictions, have started destroying them at an accelerated speed.

Now more than ever, effects of speculation on commodity prices in the Chicago Board of Trade or the Kansas wheat market are immediately transmitted to the rest of the world. Presently, US commodity markets are in the grip of a speculative price bubble similar to the one prevalent in real estate markets. After wrecking millions of households, speculative money has taken over essential commodities such as petrol, gas, wheat, rice etc. And this commodity price bubble has started affecting every corner of the world in the so-called global markets.

The corporate media is trying to avoid the core issue of the emergence and expansion of speculative financial forces. Instead, the causes of rising commodity prices stated in the media are mere trivial afterthoughts. Stated reasons of higher commodity prices neither withstand the empirical test nor economic reasoning.

Most often, rising world population, higher growth rates in China and India, poor weather conditions in the US and Australia, the plunging dollar and alternate use of land for ethanol are blamed for commodity price hikes. Higher growth rates and the plunging dollar are the most touted causes of higher commodity prices in the media. But, if one puts these reasons to test, they do not explain the price hikes.

Commodity prices have doubled or tripled in the last seven or eight months. Petrol was selling for $50 even in mid-2007 but reached a daunting $117 on April 18, 2008. Wheat, rice and other essential commodities have experienced two to three hundred percent rises in the last few months as well.

However, in the similar period the world economic growth rate has dipped down to about 1.1 percent from over 4 percent according to the IMF. Given the bleak future outlook of world economic growth rates, anticipated commodity prices should have come down somewhat. But the reverse has occurred.

Higher growth rates of China and India are also thrown right and left by the corporate, manipulated and half-educated media. China and India have been growing at faster rates for over a decade. Rising commodity prices were somewhat corresponding to higher demand from these countries.
But in the last few months, Chinese and Indian growth rates have come down too. Therefore, the doubling or trebling of commodity prices can hardly be explained by Chinese or Indian economic growth: their economies did not treble themselves in the last few months to explain the rising world prices.
Of course weather-related factors or the alternate use of land for growing crops for producing ethanol may have affected the supply of a few commodities to some extent. However, in case of many other commodities like oil and gas, supply remained constant.
Therefore, the astronomical price hikes cannot be justified or explained through a simple demand-supply equation. But many are addicted to this equation and cannot go beyond parroting the formula.
Many economists are acknowledging the effects of speculative forces in the commodities market. For example, Jeff Frankels, a noted US economist, has said that falling interest rates are causing the price hikes in commodity markets.
His argument is rather involved and cannot be elaborated in this column but the bottom line of his reasoning is that availability of cheaper money encourages commodity traders to bid up prices. This is another way of acknowledging the formation of a commodity bubble.
The commodity bubble is creating havoc in developing economies. Consumers in industrialised countries spend ten to fifteen percent of their income on essential commodities (grains etc.) while the majority in the developing world spends most of its wages on basic necessities. Most governments that had opened up their markets to foreign capital are at the mercy of global forces and cannot resist the price hikes.

The globalisation of commodity markets has decimated production capacity in many weaker economies. For example, international traders of rice destroyed the local production of rice in Haiti by flooding the market with cheaper Vietnamese rice. Now, under the global pressure, rice has become too expensive and the Vietnamese government has put restrictions on exports of rice to feed its own population. What should Haiti do now with its destroyed infrastructure of rice cultivation? The population of Haiti can riot, throw out its prime minister, but it cannot grow rice locally.

We have been arguing for some time that the neo-liberal economic model, which is creating a certain type of global economy, is extremely harmful for nascent economies.

The commodity bubble, with its effects on poor countries, has shown its real monstrous face. If governments of developing countries continue to pander to global capitalist forces, running after imaginary foreign investments that are not there anyway, they will be vulnerable to the highest levels of internal unrest and destruction.