Chapter

Nature of Export Shortfalls

Author(s):
International Monetary Fund
Published Date:
January 1980
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The amount that a member can draw under the facility is based on the net shortfall in its total export earnings. In virtually all cases, this net shortfall is smaller than the gross shortfall (i.e., the sum of the commodity shortfalls), because shortfalls experienced for some commodities are partly offset by excesses for other commodities. Consequently, the financial resources required to compensate for net shortfalls in total export earnings under a single facility are not as great as those which would be required to compensate countries under separate commodity facilities.

Fluctuations in export earnings result from both volume and price factors. At the country level, the effect of volume factors is often greater than that of price factors, but the reverse is true at the world level. This occurs because fluctuations in the volume of exports by individual countries are generally caused by factors specific to the countries concerned (such as weather conditions, strikes, or sociopolitical factors), and because the effects of these country-specific factors tend to offset each other when the export earnings of different countries are aggregated into a world total. Fluctuations in the aggregate export earnings of a large number of countries tend, therefore, to be dominated by price fluctuations which, to a large extent, reflect cyclical fluctuations of economic activity in the industrial countries. For that reason, the drawings under the compensatory financing facility follow a cyclical pattern that reflects the business cycle in industrial countries. Thus, the amount drawn under the facility in 1976 was greater than the total amount drawn in the three subsequent years.

Net and Gross Shortfalls

The distinction between net and gross shortfalls is important, as drawings under the Fund facility are based on net shortfalls while STABEX transfers are based on gross shortfalls.10 Consider a country exporting only two commodities and suppose that it experiences a shortfall of 10 for one and an excess of 6 for the other. The drawing under the Fund facility would be based on the net shortfall of 4, while the STABEX transfer would be based on the gross shortfall of 10.

For a series of consecutive years, the net shortfall in a country’s total export earnings is lower than its gross shortfall (i.e., the sum of its commodity shortfalls), except if shortfalls always occur simultaneously for all commodities. The net shortfall in total export earnings is, nevertheless, higher than the net shortfall in one component of the country’s total export earnings, except if the shortfall in that component is generally offset by a surplus in the other component of the country’s total export earnings.11 Consequently, extending the commodity coverage of the facility would generally raise net shortfalls, but the additional resources required to enlarge the coverage of an existing facility would be less than the amount required to establish an independent facility for the additional commodities. This is illustrated in Table 3, which summarizes the results of simulations conducted for 46 countries over 13 years.

Table 3.Shortfalls and Commodity Coverage: 46 Countries, 1963–75(In billions of SDRs)
Coverage1Earnings2Shortfalls2Shortfalls as Per Cent

of Earnings
Gross shortfall approach
Commodities23021.09.1
Net shortfall approach
Commodities23013.86.0
Other merchandise21111.05.2
All merchandise44121.34.8
Services1275.14.0
Merchandise plus services56824.94.4
Source: International Monetary Fund.

All data are based on statistics from the International Monetary Fund’s International Financial Statistics (IFS) and the commodities selected are those for which export earnings account for at least 5 per cent of the country’s earnings from all merchandise exports, as the IFS coverage of commodity exports is available only on this basis.

Sum of earnings and sum of shortfalls for each country and for each year.

Source: International Monetary Fund.

All data are based on statistics from the International Monetary Fund’s International Financial Statistics (IFS) and the commodities selected are those for which export earnings account for at least 5 per cent of the country’s earnings from all merchandise exports, as the IFS coverage of commodity exports is available only on this basis.

Sum of earnings and sum of shortfalls for each country and for each year.

First, for all primary commodities, the gross shortfall exceeds the net shortfall by approximately one half (SDR 21 billion compared with SDR 13.8 billion). Second, enlarging the coverage to all merchandise exports raises net shortfalls by approximately one half; the additional cost is, however, only two thirds of the cost of establishing a separate facility for other merchandise exports (7.5 compared with 11). Third, enlarging the coverage to merchandise and services raises the net shortfall by 17 per cent (from SDR 21.3 billion to SDR 24.9 billion); but the additional cost is only 70 per cent of the cost of establishing a separate facility for services only (3.6 compared with 5.1). When the coverage of the facility is enlarged, the net shortfall is raised but proportionately less than the value of export earnings covered. Consequently, the net shortfall declines in relation to the value of export earnings covered. It declines from 6.0 per cent for all commodity exports to 4.8 per cent for all merchandise exports, and to 4.4 per cent for merchandise and services combined.

Volume and Price Movements

The shortfall in export earnings depends on the relationship between fluctuations in volume and fluctuations in export unit values in much the same way as the net shortfall in the combined earnings from different commodities depends on the relationships among fluctuations in earnings from these commodities.

The relative contributions of volume and price movements to the shortfall in the value of exports are illustrated in Table 4, where the volume of exports increases every year (except in the shortfall year), and the volume shortfall amounts to 6.7 per cent of the volume exported in the shortfall year (column (1)). In the two cases, prices increase every year, but the rise in the shortfall year is below average in one case, and above average in the other. In the first of these, the price shortfall amounts to 3.8 per cent of the price level in the shortfall year (column (2)); the volume shortfall is then aggravated by the price shortfall, and the value shortfall is equal to 10.8 per cent of the value of export earnings in the shortfall year (column (3)). In the second case, the price excess amounts to 4.3 per cent of the price in the shortfall year (column (4)); the volume shortfall is partly offset by the price excess, and the value shortfall is equal to only 2.2 per cent of the value of export earnings in the shortfall year.12

Table 4.Volume and Price Components of Export Shortfalls1(Indices with basis 100 in shortfall year)
Case 1Case 2
VolumePriceValuePriceValue
(1)(2)(3)=(1)(2)100(4)(5)=(1)(4)100
Year −210085858585
Year −11059599.89094.5
Year 0100100100100100
Year +1110115126.5100110
Year +2120130156105126
Trend value106.7103.8110.895.7102.1
Shortfall6.73.810.8−4.32.2

In actual calculation, price is replaced by average export unit value which is obtained by dividing value by volume.

In actual calculation, price is replaced by average export unit value which is obtained by dividing value by volume.

At the world level, volume and price tend to move in opposite directions when price changes result mainly from supply fluctuations, which generally occur for food and beverages. In this case, prices rise when the supply is low and fall when it is high.13 At the country level, volume and prices tend also to move in opposite directions for the major exporter (i.e., the country which accounts for the major share of world exports of the commodity concerned), but not for minor exporters. For example, when a frost severely damages the coffee crop in Brazil, the price of coffee rises on the world market because traders expect the fall in the Brazilian crop to result in a significant decline in the world exportable supply of coffee. A sharp decline in the volume of coffee exported by Brazil is thus associated with an increase in the world price of coffee and in the average export unit value received by Brazil. Because Brazil accounts for the largest share of exportable supplies, prices received by other producers are influenced much more by fluctuations in Brazil’s output than in their own. Consequently, volume and price fluctuations tend to have offsetting effects on the export earnings of the major exporter, but not of the minor exporters.

Fluctuations in the export unit values received by different countries are, in percentage terms, almost the same as those of average world export unit values. In contrast, fluctuations in the volume of world exports are, in percentage terms, considerably lower than fluctuations in the volume of country exports. This explains why the contribution of volume changes to fluctuations in export earnings is often more important than that of price fluctuations at the country level, the effect of price fluctuations is clearly dominant at the world level.

Fluctuations in World Commodity Prices

Fluctuations in world commodity prices result from both demand and supply factors. Demand for imports fluctuates with the cyclical pattern of economic activity in industrial countries. But supply of exports is affected chiefly by factors which are specific to the commodities concerned, such as a frost in Brazil for coffee or a prolonged strike in U.S. mines for copper. Because of the specificity in the supply factors, price cycles are not the same for all commodities. Commodity price cycles are, nevertheless, generally related to the cyclical pattern of economic activity in industrial countries, because of the influence of demand factors.

Commodity price cycles are illustrated in Tables 5 and 6 as quarterly indices. The overall commodity price index is the weighted average of the price indices of 37 commodities other than oil and gold. The other price indices relate to 11 of the most important of these commodities. Whether the indices are measured in terms of SDRs, as in Table 5, or in real terms,14 as in Table 6, the cyclical pattern remains broadly the same.

Table 5.Nominal Commodity Prices in SDRs, Third Quarter 1973–First Quarter 19801(Quarterly prices 1972 = 100)
Overall2BeefWoolCottonRubberCocoaCoffeeTinCopperCopraWheatSugar
1973III151
187218200113120169239213112
IV158130158
227167116140183322242127
1974I182117147205
182125178197
232
II18693137164220
466197278
III18195116152177226117215147403220369
IV
8193127149226115177115326244
1975I164
149197109176104202194385
II
78101129
163103154166216
III1478398138157165145163106152206208
IV14492111144160182155
134199168
1976I153100128169195205184163109
200175
II171
139188229262258188134147196175
III17799148
223317280207
210175132
IV18092
22123141434320511323714598
1977I213102161215232550496252127282146108
II
95150206220564
242120320
112
III188
147163227
39527310522013092
IV18193146
235493349
10423114491
1978I179113
163231424329283
25215099
II178129144172245440291
10826616187
III
120150172268457251301112288158
IV181138148
28451224733111733716493
1979I184166159177284461
32614540516891
II199
171176
446271
18390
III205149172
330416330342153398206101
IV213169184153332
331367166353
151
1980I227164184214389410304383203327205223
Source: International Monetary Fund.

Peaks are shown in boxes and troughs in circles.

Weighted averages of price indices of 37 commodities other than oil and gold. Commodity composition and weights are given in Table 7.

Source: International Monetary Fund.

Peaks are shown in boxes and troughs in circles.

Weighted averages of price indices of 37 commodities other than oil and gold. Commodity composition and weights are given in Table 7.

Table 6.Real Commodity Prices, Third Quarter 1973–First Quarter 19801,2(Quarterly prices 1972 = 100)
Over-all3BeefWoolCottonRubberCocoaCoffeeTinCopperCopraWheatSugar
1973III137
169198182103109154217194102
IV143117142
205151105126165291219114
1974I
101128178
158
154171
201
II14673108129173
102
366155218
III138728811613517289163112307167281
IV1395867911071628312783233175
1975I114
1041377612272140135267
II
547089
11371107115150
III10358699611011610211474106144146
IV1006478100111127108
94139117
1976I105688711513314112611174
136120
II114
92125
1741711258998130117
III1156596
145206182134
13611486
IV11458
139146261216129711509262
1977I13364101134145344310157791769168
II
5993127136349
150741988069
III114
8998137
23916563133
56
IV1085587
140294208
621388654
1978I10566
95
248193166
1488858
II102748299141252167
621529350
III
6884971512581411696316289
IV1007782
158285137184651879132
1979I99898595152248
175782179049
II105
93
235143
9748
III1047587901662101671727720110451
IV1048388
16319716218081173
74
1980I10878871021861961451839715698106
Sources: Table 5 and United Nations, Monthly Bulletin of Statistics.

Peaks are shown in boxes and troughs in circles.

Real prices calculated by dividing nominal prices given in Table 5 by UN price index of manufactures exported by developed countries.

Weighted averages of price indices of 37 commodities other than oil and gold. Commodity composition and weights are given in Table 7.

Sources: Table 5 and United Nations, Monthly Bulletin of Statistics.

Peaks are shown in boxes and troughs in circles.

Real prices calculated by dividing nominal prices given in Table 5 by UN price index of manufactures exported by developed countries.

Weighted averages of price indices of 37 commodities other than oil and gold. Commodity composition and weights are given in Table 7.

For more than half of the commodities listed, prices reached their peak in the first half of 1974, shortly after the peak of the business cycle in the industrial countries, and were at their lowest in the first half of 1975, at the bottom of the recession. For some commodities, however, the cyclical pattern was different because price fluctuations were caused primarily by supply factors. In particular, the sharp increase in coffee prices which occurred in April 1977 resulted from the damage to coffee trees caused by a severe frost in Brazil. Because peaks and troughs did not coincide for all commodities, price fluctuations were considerably smaller for the overall commodity price index than for most individual commodity prices. To take just one example, from peak to trough, the overall index in real terms fell from 158 to 97, while the sugar index fell from 405 to 47 (Table 6).

Over the period 1963–76, fluctuations in quarterly prices were three times as large for hides, copra, fish meal, and sugar15 as they were for the overall commodity index; they were twice as large for copper, sisal, and rubber (Table 7). In turn, fluctuations in the overall commodity index were almost three times as large as fluctuations in the price index of manufactures.

Table 7.Index of Quarterly Price Fluctuations, 1963–76
Fluctuation Index2
ProductWeights1Nominal

prices3
Real

prices4
Manufactures (UN index)1.54
Commodities other than oil and gold100.04.143.72
Food31.4100.03.773.05
Oils and oilseeds27.16.846.33
Groundnut oil7.26.255.58
Copra7.110.4510.10
Groundnut cake4.76.386.44
Fish meal4.510.2710.15
Palm oil2.78.557.84
Soybean meal0.56.867.20
Soybeans0.45.404.98
Cereals25.74.273.51
Maize10.14.073.51
Wheat8.34.554.18
Rice7.38.177.30
Sugar21.17.056.17
U.S. price10.14.884.15
Free market price7.510.139.28
EEC price3.55.514.68
Meat18.53.063.23
Beef14.13.403.56
Lamb4.43.433.49
Bananas7.64.013.71
Beverages18.2100.05.395.25
Coffee67.16.266.30
Columbia mild12.86.446.44
Other milds14.56.786.72
Unwashed arabica24.26.786.89
Robusta15.65.855.92
Cocoa19.79.338.90
Tea13.24.674.02
Agricultural raw materials22.5100.05.125.14
Cotton34.24.374.06
Wool28.76.987.01
Rubber23.17.897.71
Hides8.010.6310.81
Jute4.04.883.97
Sisal2.08.478.02
Metals27.9100.05.335.05
Copper48.68.718.46
Iron ore20.83.763.23
Tin11.05.784.98
Aluminum10.22.892.15
Zinc3.75.965.50
Nickel3.01.942.18
Lead2.77.476.65
Source: International Monetary Fund.

Weights based on exports by primary producing countries in the period 1968–70.

Average price shortfall as percentage of the trend value. The price shortfall is the downward deviation from the trend value measured as the geometric average of the 19 quarterly values centered on the quarter for which the shortfall is calculated. Shortfalls are calculated for the 64 quarters starting in the second quarter of 1963, are expressed as percentages of prices, and are averaged for the 64 quarters taking price excess as zero shortfall.

Nominal prices as given in Table 5.

Real prices as given in Table 6.

Source: International Monetary Fund.

Weights based on exports by primary producing countries in the period 1968–70.

Average price shortfall as percentage of the trend value. The price shortfall is the downward deviation from the trend value measured as the geometric average of the 19 quarterly values centered on the quarter for which the shortfall is calculated. Shortfalls are calculated for the 64 quarters starting in the second quarter of 1963, are expressed as percentages of prices, and are averaged for the 64 quarters taking price excess as zero shortfall.

Nominal prices as given in Table 5.

Real prices as given in Table 6.

Fluctuations in a country’s total export earnings are obviously affected by the commodity composition of that country’s exports. Countries with highly fluctuating export earnings are those dependent mainly on a single commodity export for which world prices fluctuate widely (e.g., Zambia, which derives about 95 per cent of its export earnings from copper). Countries largely dependent on commodity exports but with a well-diversified export pattern (e.g., Australia) are not subject to such wide fluctuations in export earnings. Countries which depend mainly on exports of manufactures experience the smallest fluctuations in export earnings (Table 8).

Table 8.Export Earnings Instability and Dependency on Commodity Exports
Country GroupsExport Earnings

Instability1
Dependency on

Commodity Exports2
Developing countries4.179
of which
The Gambia8.7963
Togo8.5934
Zambia7.9995
Korea2.618
More developed primary
exporting countries2.856
of which
Iceland5.3956
New Zealand3.3907
Australia1.973
Industrial countries1.621
Source: International Monetary Fund.

Shortfall as percentage of trend value of exports, averaged over 1959–76.

Commodity export earnings as percentage of total export earnings 1961–75.

Groundnuts and groundnut products account for 87 per cent (of total export earnings).

Phosphates account for 73 per cent; cocoa and coffee together for 20 per cent.

Copper accounts for 95 per cent.

Fish and fish products account for 86 per cent.

Meat, dairy products, and cheese account for 60 per cent.

Source: International Monetary Fund.

Shortfall as percentage of trend value of exports, averaged over 1959–76.

Commodity export earnings as percentage of total export earnings 1961–75.

Groundnuts and groundnut products account for 87 per cent (of total export earnings).

Phosphates account for 73 per cent; cocoa and coffee together for 20 per cent.

Copper accounts for 95 per cent.

Fish and fish products account for 86 per cent.

Meat, dairy products, and cheese account for 60 per cent.

Fluctuations in the overall price index for commodities other than beverages, oil, and gold can be explained to a large extent by movements in the business cycle indicator (taken as a proxy for industrial activity) and the price index for manufactured exports (taken as a proxy for inflation in world trade). This is illustrated in Chart 1, which compares actual values of the overall price index with the values calculated from a regression equation fitted on semiannual data over the period 1962–79. Although price fluctuations are lower for the overall commodity index than for individual commodities, they remain sizable. For commodities other than oil and gold, the largest annual price increase was 63 per cent in nominal terms and 40 per cent in real terms, while the sharpest decline was 25 per cent in nominal terms and 36 per cent in real terms (Table 9).

Chart 1.Actual and Simulated Indices of Nominal Prices of Commodities, 1962–791,2

(1970 = 100)

Source: International Monetary Fund.

1 Excluding oil, gold, and beverages.

2 Price index calculated on the basis of least-squares regression linking commodity prices, Pt, to prices of manufactures, Pmt, business cycle indicator, Bt, and lagged value of commodity prices, Pt–1:

lnPt=0.04(1.0)+2.22(5.2)lnBt+0.70(4.7)lnPmt+0.47(3.6)lnPt1+εt,Com-BusinessPrices ofCommoditymoditycyclemanu-pricespricesindicatorfactureslaggedϵt=0.75ϵt1+ηt.

Table 9.Business Cycle Indicator and Price Changes, 1971–First Quarter, 19801

(Price increase in per cent per annum)2

Changes in Nominal PricesChanges in Real Price4
BusinessCommoditiesCommodities
Cycleother thanManu-other than
Time PeriodsIndicator3gold and oil5Gold6Oil7factures8gold and oilGoldOil
1971Jun.0.97−6.613.226.34.8−10.88.020.6
Dec.0.960.616.126.310.5−8.95.114.4
1972Jun.0.9712.954.85.010.12.540.6−4.8
Dec.0.9929.247.05.04.323.940.90.5
1973Jun.
59.4
34.114.2
15.4
Dec.1.02
67.086.422.333.036.555.2
1974Jun.1.0029.728.3
24.14.53.4
Dec.0.9512.272.2151.5
−10.737.098.9
1975Jun.
−24.66.52.717.1
−9.0
Dec.0.89
8.20.5− 25.3
8.0
1976Jun.0.9124.0−23.48.2
−20.213.0
Dec.0.9227.3−3.90.18.617.2−11.4−7.8
1977Jun.0.9218.712.07.28.99.02.8−2.0
Dec.0.921.219.89.98.4−6.610.51.4
1978Jun.0.92
30.53.113.9
14.6−9.2
Dec.
6.129.5
−9.910.0
1979Jun.0.9320.951.941.513.17.034.325.4
Dec.0.9121.6119.048.713.57.192.931.0
1980Mar.0.91
13.9
Source: International Monetary Fund.

Peaks of business cycles and sharpest price increases are shown in boxes and troughs of business cycles and sharpest price declines in circles.

Prices measured in U.S. dollars.

Weighted ratio of actual output to potential output of the manufacturing sector for seven industrial countries; ratios refer to the six-month period ended in month indicated.

Nominal prices deflated by UN quarterly price index of manufactures exported by industrial countries.

Based on the prices of 37 primary commodities.

London price.

Weighted average of quoted oil prices exported under contract by Saudi Arabia, Venezuela, and Libya (from International Monetary Fund, International Financial Statistics).

UN quarterly price index of manufactures exported by industrial countries.

Source: International Monetary Fund.

Peaks of business cycles and sharpest price increases are shown in boxes and troughs of business cycles and sharpest price declines in circles.

Prices measured in U.S. dollars.

Weighted ratio of actual output to potential output of the manufacturing sector for seven industrial countries; ratios refer to the six-month period ended in month indicated.

Nominal prices deflated by UN quarterly price index of manufactures exported by industrial countries.

Based on the prices of 37 primary commodities.

London price.

Weighted average of quoted oil prices exported under contract by Saudi Arabia, Venezuela, and Libya (from International Monetary Fund, International Financial Statistics).

UN quarterly price index of manufactures exported by industrial countries.

Cyclical Pattern of Compensatory Drawings

For a single country, the cyclical pattern of export shortfalls is somewhat obscured by random fluctuations in the volume of exports. For a large group of countries, however, the cyclical pattern appears much more clearly: the effect of price fluctuations becomes dominant because volume fluctuations, which mainly reflect country-specific events (such as floods or strikes), tend to offset each other when country shortfalls are added up. Over a 20-year period, 90 per cent of the variance in the sum of country shortfalls can be explained by variations in two economic variables: the business cycle indicator in industrial countries and the price index for manufactures exported by industrial countries. In contrast, only 40 per cent of the variance in individual country shortfalls can be explained by variations in the same two variables.16

In any given year, some countries experience shortfalls in their export earnings while others experience excesses, and the net shortfall in the aggregate earnings of all countries is the difference between the gross shortfall (i.e., the sum of country shortfalls) and the gross excess (i.e., the sum of country excesses).17 The relationship between net and gross shortfalls is illustrated in Chart 2 for 71 countries over 17 years (1959 through 1975). For each year, the net shortfall or excess is measured along the horizontal axis, while the gross shortfall and the gross excess are measured along the vertical axis.

Chart 2.Relation Between Gross and Net Country Shortfalls or Excesses for 71 Countries from 1959 to 19751

(Expressed as percentage of current aggregate earnings)

Source: L. M. Goreux, op. cit.

1 Each dot corresponds to a particular year.

In 1969, which could be considered a relatively normal year, the number of countries that experienced shortfalls was about the same as the number that experienced excesses. The gross shortfall and the gross excess were approximately the same (about 2 per cent of aggregate earnings) and the net shortfall was almost zero. In 1974, which was an exceptionally good year, very few countries had a shortfall and most of them had an excess. The gross shortfall was very small (0.1 per cent) while the gross excess was very large (10.3 per cent); thus, the net excess was also very large (10.2 per cent). In 1975, which was a very bad year, the opposite occurred. As few countries experienced an excess, the gross excess was small (1.2 per cent) while the gross shortfall was large (8.9 per cent); accordingly, the net shortfall was also large (7.7 per cent).

Because the gross shortfall can be derived fairly accurately from the net shortfall using the hyperbolic function illustrated in Chart 2, there is a relatively simple way of assessing the impact of the business cycle on the sum of country shortfalls, which is a major determinant of compensatory financing drawings. It consists in projecting the aggregate export earnings of all countries (instead of the earnings of each country individually), calculating the net shortfall, and deriving the gross shortfall from the function illustrated in Chart 2.

The relation between gross and net country shortfalls (Chart 2) is very similar to that between gross and net commodity shortfalls (Chart 3), which correspond respectively to the STABEX approach and the Fund facility approach. The shape of the curve representing the relation between gross and net commodity shortfalls depends on the degree of export diversification of the country concerned (Chart 3). At one extreme are the countries exporting a single commodity; for those, STABEX shortfalls and Fund facility shortfalls are identical. At the other extreme are the countries with a highly diversified export pattern. Countries in this group would almost always be eligible for a STABEX transfer as it would be exceptional if a shortfall were not to arise for at least one commodity. In good years, when shortfalls occur for only a few commodities, the country would clearly be better off with the STABEX approach than with the Fund facility approach, as it would receive something with the former and nothing with the latter. In bad years, when shortfalls occur for most commodities, the country would be slightly better off with the STABEX approach. In exceptionally bad years, when shortfalls occur for all commodities, the country would receive the same amount with both approaches.18

Chart 3.Degree of Export Diversification and Relation Between Gross and Net Commodity Shortfalls

(Expressed as percentage of countries’ export earnings)

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