In their pursuit of economic development and, in some cases, to service sizable foreign debts, developing countries seek to strengthen export performance in traditional primary commodities in the short run while diversifying into more income-elastic export products in the long run. Yet a strategy of increasing the volume of traditional exports, particularly when other countries are attempting to do the same thing at the same time, may prove counterproductive if the main result of higher export volumes is lower commodity prices for all. Because measures to stimulate export production are often part of economic stabilization and adjustment programs, the possible repercussions of collective actions in world commodity markets are of concern to the International Monetary Fund.

The Fund has addressed these concerns in a recent study (Goldstein (1986)), which examines the potential impact of collective exchange rate action on world commodity prices. This study identifies three important factors that determine the world price effects of multilateral exchange rate changes: (1) shares in world production. (2) degrees of concentration of production, and (3) price elasticities of supply and demand. The study evaluates these factors in the context of a general discussion of aggregated developing countries and commodities and concludes that the potential for deleterious collective effects is not great because production of many primary commodities is so widely dispersed that it would take simultaneous exchange rate action by many countries to achieve much of an impact on world supply. Moreover, even though world demand is usually quite inelastic, the relevant elasticities of supply are frequently low, so that supply shifts and consequent world price reductions are dampened, even if production is highly concentrated.

Although the Fund study is helpful, it lacks the detail necessary to be useful in many practical situations. To fill this need, this paper presents a simplified and readily transparent analytical framework that interrelates the key variables identified above, using a minimum of readily available information.

The Analytical Framework

Most world markets for non-oil primary commodities are essentially competitive. Although particular distortions may affect particular markets, these qualifications are matters of degree rather than kind. As with most other studies, the model formulated here therefore assumes that the market is cleared reasonably quickly through price adjustments.

Some Supply-Side Properties

Because the objective is to estimate whether a single country, or a small group of countries, can benefit through increased export earnings from its major primary commodity after a devaluation, it is useful to explore the properties of equation (6) in two extreme cases, as well as the “crossover point” at which returns to devaluation shift from positive to negative values. In each case it is assumed that no shift in world demand occurs, so that the focus on supply-side effects can be maintained.

First, when the devaluing country is a small producer with an insignificant share of world exports, the first term in equation (6) disappears, so that the country always benefits by the maximum amount possible, with a percentage change in export value of⁶

$\begin{array}{cc}\mathrm{\Delta }{v}_i=-R_i{a}_i,& \left(7\right)\end{array}$

Second, at the opposite extreme, if all exporters were to devalue simultaneously (the group collectively being considered the ith, or monopoly, exporter), the change in the group’s equilibrium export value would be

$\begin{array}{cc}\mathrm{\Delta }{v}_i=R_i\frac{(a+a_{i}b)}{(a-b)}\mathrm{.}& \left(8\right)\end{array}$

Clearly the expansion of supply in this case does affect the world price. Whether the effect on export receipts is positive or negative depends on whether world demand is elastic or inelastic. If demand is elastic, the effect will be positive; if inelastic, it will be negative.

Third, the crossover point, or critical market share (θi*) for country i (assuming a single country or small group devalues and others do not), is

$\begin{array}{cc}{\theta }_i^{*}=\frac{a_i(a-b)}{a(1+a_i)}\mathrm{.}& \left(9\right)\end{array}$

With appropriate estimates of supply and demand elasticities, equation (9) can be used to evaluate the likelihood that particular countries could benefit from devaluation tn particular export markets. For example, using the first set of elasticity estimates (SR 1, MR 1, LR 1) in Table 1, the critical market shares for country 3 are 20.1 percent in the short run (SR) and 21.9 percent in both the medium run (MR) and long run (LR). Since country 3’s world export share is 16.3 percent (Table 2), it is likely that country 3 could benefit. Alternatively, using the second set of estimates (SR 2, MR 2, LR 2) in Table 1, the critical market shares for the commodity in the short, medium, and long runs would be 27 percent, 44 percent, and 56 percent, respectively. An “average” country (that is, one whose supply elasticity is equivalent to the world weighted average) whose market share is less (more) than these benchmarks could expect to gain (lose) export receipts from this commodity after a devaluation by itself alone.

^{Table 1.}

Commodity Elasticity Assumptions

^aCurrent and one-year lag.

^bFive to six years.

^cNine years or more.

^dWeighted average using weights in Table 1.

^{Table 1.}

Commodity Elasticity Assumptions

			Short Runa		Medium Runb		Long Runc
		Item	SR 1	SR 2	MR 1	MR 2	LR 1	LR 2
World market
	Demand		-0.17	-0.20	-0.26	-0.27	-0.30	-0.34
	Supply		0.14	0.10	0.24	0.30	0.42	0.50
Region/country supply
	Continent Xd		0.20	0.10	0.23	0.30	0.39	0.50
		Country 1	0.10	0.10	0.32	0.30	0.59	0.50
		Country 2	0.26	0.10	0.32	0.30	0.59	0.50
		Country 3	0.10	0.10	0.11	0.30	0.11	0.50
		Country 4	0.18	0.10	0.11	0.30	0.13	0.50

^aCurrent and one-year lag.

^bFive to six years.

^cNine years or more.

^dWeighted average using weights in Table 1.

View Table

^{Table 1.}

Commodity Elasticity Assumptions

			Short Runa		Medium Runb		Long Runc
		Item	SR 1	SR 2	MR 1	MR 2	LR 1	LR 2
World market
	Demand		-0.17	-0.20	-0.26	-0.27	-0.30	-0.34
	Supply		0.14	0.10	0.24	0.30	0.42	0.50
Region/country supply
	Continent Xd		0.20	0.10	0.23	0.30	0.39	0.50
		Country 1	0.10	0.10	0.32	0.30	0.59	0.50
		Country 2	0.26	0.10	0.32	0.30	0.59	0.50
		Country 3	0.10	0.10	0.11	0.30	0.11	0.50
		Country 4	0.18	0.10	0.11	0.30	0.13	0.50

^aCurrent and one-year lag.

^bFive to six years.

^cNine years or more.

^dWeighted average using weights in Table 1.

^{Table 2.}

Individual Country Trade Weights (Shares)

Note: Trade weights are based on the average value of net exports during a recent period; those with less than 2 percent shares were deleted before renormalizing. Adjustments were made to incorporate estimates of projected shifts of production through the midpoint (if the projection period, and to distribute the share of the U.S.S.R. according to relative weights of the remaining countries.

^{Table 2.}

Individual Country Trade Weights (Shares)

			Country	Trade Shares
Net exporters				100.0
	Developing countries			100.0
		Continent X		61.8
			Country 1	6.1
			Country 2	29.8
			Country 3	16.3
			Country 4	9.6
		Continent Y		8.0
			Country 5	8.0
		Continent Z		30.2
			Country 6	24.2
			Country 7	1.8
			Country 8	4.2
Net importers				100.0
	Industrial countries			100.0
			Country 9	5.8
			Country 10	10.6
			Country 11	17.2
			Country 12	4.6
			Country 13	7.2
			Country 14	2.6
			Country 15	2.6
			Country 16	13.2
			Country 17	36.2

Note: Trade weights are based on the average value of net exports during a recent period; those with less than 2 percent shares were deleted before renormalizing. Adjustments were made to incorporate estimates of projected shifts of production through the midpoint (if the projection period, and to distribute the share of the U.S.S.R. according to relative weights of the remaining countries.

View Table

^{Table 2.}

Individual Country Trade Weights (Shares)

			Country	Trade Shares
Net exporters				100.0
	Developing countries			100.0
		Continent X		61.8
			Country 1	6.1
			Country 2	29.8
			Country 3	16.3
			Country 4	9.6
		Continent Y		8.0
			Country 5	8.0
		Continent Z		30.2
			Country 6	24.2
			Country 7	1.8
			Country 8	4.2
Net importers				100.0
	Industrial countries			100.0
			Country 9	5.8
			Country 10	10.6
			Country 11	17.2
			Country 12	4.6
			Country 13	7.2
			Country 14	2.6
			Country 15	2.6
			Country 16	13.2
			Country 17	36.2

Note: Trade weights are based on the average value of net exports during a recent period; those with less than 2 percent shares were deleted before renormalizing. Adjustments were made to incorporate estimates of projected shifts of production through the midpoint (if the projection period, and to distribute the share of the U.S.S.R. according to relative weights of the remaining countries.

A final case of interest is that in which multiple exporters, each with different supply elasticities, devalue simultaneously. For simplicity, assume that both exporters (countries 1 and 2) devalue by the same amount, then:

^{Table 3.}

Expected Relative Gains or Losses, by Policy Regime and Elasticity of Export Supply

^aA competitive policy means that the country participates in the devaluing group; a passive policy means that there is no change in the exchange rate as others devalue.

^{Table 3.}

Expected Relative Gains or Losses, by Policy Regime and Elasticity of Export Supply

Elasticity of	Policy Regimea
Export Supply	Competitive	Passive
High	Gain more/lose less	Lose more
Low	Gain less/lose more	Lose less

^aA competitive policy means that the country participates in the devaluing group; a passive policy means that there is no change in the exchange rate as others devalue.

View Table

^{Table 3.}

Expected Relative Gains or Losses, by Policy Regime and Elasticity of Export Supply

Elasticity of	Policy Regimea
Export Supply	Competitive	Passive
High	Gain more/lose less	Lose more
Low	Gain less/lose more	Lose less

^aA competitive policy means that the country participates in the devaluing group; a passive policy means that there is no change in the exchange rate as others devalue.

$\begin{array}{cc}\frac{\mathrm{\Delta }{v}_1}{R_1}-\frac{\mathrm{\Delta }{v}_2}{R_2}=(1-c)(a_2-a_1),& \left(10\right)\end{array}$

where c = a/(a - b).

If both countries pursue competitive policies (that is, both devalue) and are gaining from devaluation (which, as noted, depends on the elasticity of demand), the country with the higher supply elasticity will gain more; if both countries arc losing, the country with a higher supply elasticity will lose less. Because it is intuitively clear that a country with a higher supply elasticity will lose more than one with a lower elasticity if both remain passive as the world price falls because of a third party’s actions, the expected pattern of relative gains and losses can be summarized as in Table 3.

II. Simulations

The problems in using the type of model outlined above for an applica-tion of the kind implemented here have been raised in previous studies.⁷ The simulations reported here were designed to minimize the risk that any of these problems would remain to cloud the conclusions. Two sets of supply and demand elasticities were used in the simulations; one set was obtained from the empirical literature, and the other was constructed on the basis of Fund staff estimates. The results reported here average those calculated from each set of elasticities, although the separate results did not differ much.⁸ Note that, although the model here uses elasticities of exports, the estimates available in the literature in general refer to production. The main variables intervening between production and export flows are domestic consumption and stocks. Domestic consumption is negligible for almost all of the types of commodities considered here, and the results can be thought of as implying constant stocks—as seems reasonable beyond the short run, when production and consumption tend to balance.

^{Table 4.}

Baseline Commodity Price Projections

(Indices; in U.S. dollars)

Note: The manufacturers’ price is the unit value of exports of manufactures (UVM) from industrial countries.

^aDeflated by the UVM.

^{Table 4.}

Baseline Commodity Price Projections

(Indices; in U.S. dollars)

	Base	:
Commodity	Year	1	2	3	4	5	6	7	8	9	10
Primary commodity	100.0	90.4	89.9	92.9	94.8	96.8	10O.7	104.6	109.5	117.3	129.0
Manufactures	100.0	114.0	119.1	124.5	130.1	135.9	142.1	148.5	155.1	162.1	169.4
Real primary commoditya	100.0	79.3	75.5	74.6	72.9	71.2	70.9	70.4	70.6	72.4	76.2

Note: The manufacturers’ price is the unit value of exports of manufactures (UVM) from industrial countries.

^aDeflated by the UVM.

View Table

^{Table 4.}

Baseline Commodity Price Projections

(Indices; in U.S. dollars)

	Base	:
Commodity	Year	1	2	3	4	5	6	7	8	9	10
Primary commodity	100.0	90.4	89.9	92.9	94.8	96.8	10O.7	104.6	109.5	117.3	129.0
Manufactures	100.0	114.0	119.1	124.5	130.1	135.9	142.1	148.5	155.1	162.1	169.4
Real primary commoditya	100.0	79.3	75.5	74.6	72.9	71.2	70.9	70.4	70.6	72.4	76.2

Note: The manufacturers’ price is the unit value of exports of manufactures (UVM) from industrial countries.

^aDeflated by the UVM.

The baseline scenario is presented in Table 4, and the results of the simulations (including the baseline case) are summarized in Table 5. The baseline senario shows a cumulative fall from the base year in the real commodity price of 25 percent in the short run (1-2 years), 29 percent in the medium run (5-6 years), and 24 percent in the long run (9-10 years).⁹

The initial set of supply scenarios included three runs (A-C in section II of Table 5) in which alternative sets of countries are assumed to devalue against the U.S. dollar by 3 percent a year over a decade: (A) country 2, accounting for 29.8 percent of world exports; (B) countries 2 and 3, with 46.1 percent; and (C) all exporters, with 100 percent.¹⁰ When country 2 alone devalues, the “small country” assumption holds, and the country benefits. In both the short run and medium run the rewards are relatively modest, but in the long run real export receipts from this commodity are raised by 7 percent over the baseline scenario. All other exporters suffer a decline in receipts that is somewhat greater than the fall in the world price because they all have positive supply elasticities— that is, the decline in price also elicits lower output.

When countries 2 and 3 devalue simultaneously (with it assumed that each acts alone), there eventually is a significant decline in the world price, although the net increase in world volume is small. Neither country benefits through the medium term, although country 2 benefits in the long run because of its much higher supply elasticity (see Table 1). The losses suffered by the other exporters exhibit the opposite tendency.¹¹

^{Table 5.}

Supply Simulations: Effects on World Market Prices and Volumes and Selected Countries’ Export Earnings from a Major Commodity

^aThe deflator is the export unit value of manufactures (UVM) of industrial countries, in U.S. dollars, from Table 4.

^bThe simulation results shown here use the average of the two sets of elasticities for each period that are presented in Table 1.

^cFigures in parentheses are percentage world market shares, from Table 2.

^{Table 5.}

Supply Simulations: Effects on World Market Prices and Volumes and Selected Countries’ Export Earnings from a Major Commodity

				Short Run	Medium Run	Long Run
Policy Scenario				(1-2 years)	(5-6 years)	(9-10 years)
Percentage change in real price a
I. Baseline scenario
	World price			-25	-29	-24
Percentage point deviation from baseline scenariob
II. Selected exporters’ expansion
	A. Country 2 (29.8)c
		World price		-1	-3	-5
		World volume		—	1	2
		Continent X’s exports		—	-1	-1
			Country 1	-1	-3	-7
			Country 2	—	2	7
			Country 3	-1	-3	-6
			Country 4	-1	-3	-6
	B. Countries 2 and 3 (46.1)c
		World price		-1	-4	-7
		World volume		—	1	2
		Continent X’s exports		-1	-2	-2
			Country 1	-1	-5	-11
			Country 2	—	—	3
			Country 3	—	-1	-1
			Country 4	-1	-5	-9
	C. All exporters (100.0)c
		World price		-2	-8	-15
		World volume		—	2	5
		Continent X’s exports		-2	-6	-11
			Country 1	-2	-6	-9
			Country 2	-2	-6	-9
			Country 3	-2	-7	-12
			Country 4	-2	-7	-13
	D. Selective pegs
		World price		—	2	3
		World volume		—	-1	-1
		Continent X’s exports		—	1	1
			Country 1	—	—	-1
			Country 2	—	—	-1
			Country 3	—	3	3
			Country 4	—	1	1
	E. Matching reaction (all exporters)
		World price		-1	-8	-9
		World volume		—	2	3
		Continent X’s exports		-2	-6	-6
			Country 1	-2	-5	-5
			Country 2	-2	-5	-5
			Country 3	-2	-6	-7
			Country 4	-2	-6	-7
	F. Matching reaction
		World price		-1	-6	-8
		World volume		—	2	2
		Continent X’s exports		-2	-4	-4
			Country 1	-2	-4	-3
			Country 2	-2	-4	-3
			Country 3	-2	-5	-5
			Country 4	-2	-5	-6
	G. Matching reaction (noncontinent X)
		World price		-1	-3	-3
		World volume		—	1	1
		Continent X’s exports		-2	-4	-5
			Country 1	-2	-4	-5
			Country 2	-2	-4	-5
			Country 3	-2	-4	-5
			Country 4	-2	-4	-5
	H. Passive reaction
		World price		-1	-2	-2
		World volume		—	1	1
		Continent X’s exports		-2	-2	-3
			Country 1	-2	-2	-3
			Country 2	-2	-2	-3
			Country 3	-2	-2	-3
			Country 4	-2	-2	-3

^aThe deflator is the export unit value of manufactures (UVM) of industrial countries, in U.S. dollars, from Table 4.

^bThe simulation results shown here use the average of the two sets of elasticities for each period that are presented in Table 1.

^cFigures in parentheses are percentage world market shares, from Table 2.

View Table

^{Table 5.}

Supply Simulations: Effects on World Market Prices and Volumes and Selected Countries’ Export Earnings from a Major Commodity

				Short Run	Medium Run	Long Run
Policy Scenario				(1-2 years)	(5-6 years)	(9-10 years)
Percentage change in real price a
I. Baseline scenario
	World price			-25	-29	-24
Percentage point deviation from baseline scenariob
II. Selected exporters’ expansion
	A. Country 2 (29.8)c
		World price		-1	-3	-5
		World volume		—	1	2
		Continent X’s exports		—	-1	-1
			Country 1	-1	-3	-7
			Country 2	—	2	7
			Country 3	-1	-3	-6
			Country 4	-1	-3	-6
	B. Countries 2 and 3 (46.1)c
		World price		-1	-4	-7
		World volume		—	1	2
		Continent X’s exports		-1	-2	-2
			Country 1	-1	-5	-11
			Country 2	—	—	3
			Country 3	—	-1	-1
			Country 4	-1	-5	-9
	C. All exporters (100.0)c
		World price		-2	-8	-15
		World volume		—	2	5
		Continent X’s exports		-2	-6	-11
			Country 1	-2	-6	-9
			Country 2	-2	-6	-9
			Country 3	-2	-7	-12
			Country 4	-2	-7	-13
	D. Selective pegs
		World price		—	2	3
		World volume		—	-1	-1
		Continent X’s exports		—	1	1
			Country 1	—	—	-1
			Country 2	—	—	-1
			Country 3	—	3	3
			Country 4	—	1	1
	E. Matching reaction (all exporters)
		World price		-1	-8	-9
		World volume		—	2	3
		Continent X’s exports		-2	-6	-6
			Country 1	-2	-5	-5
			Country 2	-2	-5	-5
			Country 3	-2	-6	-7
			Country 4	-2	-6	-7
	F. Matching reaction
		World price		-1	-6	-8
		World volume		—	2	2
		Continent X’s exports		-2	-4	-4
			Country 1	-2	-4	-3
			Country 2	-2	-4	-3
			Country 3	-2	-5	-5
			Country 4	-2	-5	-6
	G. Matching reaction (noncontinent X)
		World price		-1	-3	-3
		World volume		—	1	1
		Continent X’s exports		-2	-4	-5
			Country 1	-2	-4	-5
			Country 2	-2	-4	-5
			Country 3	-2	-4	-5
			Country 4	-2	-4	-5
	H. Passive reaction
		World price		-1	-2	-2
		World volume		—	1	1
		Continent X’s exports		-2	-2	-3
			Country 1	-2	-2	-3
			Country 2	-2	-2	-3
			Country 3	-2	-2	-3
			Country 4	-2	-2	-3

^aThe deflator is the export unit value of manufactures (UVM) of industrial countries, in U.S. dollars, from Table 4.

^bThe simulation results shown here use the average of the two sets of elasticities for each period that are presented in Table 1.

^cFigures in parentheses are percentage world market shares, from Table 2.

The final run in this set of scenarios—when all exporters devalue simultaneously—illustrates how dramatically the world price can fall (by 15 percent in real terms) when world demand is inelastic, even with moderate increments in supply. All countries lose, of course, with the more supply-responsive among them losing less in the long run.

The fourth scenario (D) assumes that the developing country exporters tie their currencies to an industrial country’s currency (or to a basket of such currencies). Specifically, countries 1 and 2 remain linked to country 10, country 4 links to country 16, and all other exporters link to the U.S. dollar (the currency of country 17). When combined with the assumption of the baseline scenario that the major nondollar currencies appreciate against the U.S. dollar between the short and medium run,¹² scenario D results in a slight net contraction of world output and a slight increase in the world price. Both of the countries aligning with country 10 lose because their export prices fall, which induces a reduction in their exports. Country 3, the only country in continent X that remains tied to the dollar, clearly gains the most.

The final set of scenarios consists of four parts (E-H in section II of Table 5); in each run country 6 is assumed to depreciate against the U.S. dollar by 15 percent in year 2, remaining at par at other times. In the first run (E), all other exporters are assumed to match country 6’s move in year 3. In the next run (F), only the exporters of continent X match country 6’s move; in the third run (G), only exporters outside of continent X match country 6. In the final run (H), all other countries remain passive. The comparative results suggest that the exporters of continent X lose least by remaining passive. If they and all others match country 6’s devaluation, additional supplies on world markets simply drive the world price lower. If the exporters outside of continent X do not go along, then an intermediate position is reached. In each case, the active countries with the most elastic production structures lose least.

III. Concluding Remarks

The simulation results of this exercise, based on estimates of the relevant elasticities and trade shares of an extant commodity market, suggest that the possibility of a country’s experiencing reduced export earnings from its major commodity export when it—and only one other large producer of the commodity—devalue is real. This result should not be generalized, however, because it depends on the presence of characteristics that are likely to cause such effects, such as large shares in world exports concentrated in only a couple of producers and a world market characterized by highly inelastic demand. Whether such effects are likely in other commodity markets is an empirical question that in most cases cannot be settled a priori.

Even if such deleterious effects seemed likely, however, this exercise is not an argument against devaluation. Devaluation is a general instrument that diverts resources into nontraditional export- and import-competing production, as well as into traditional export activity. The analysis docs, though, imply that, for some countries whose exports are dominated by a single commodity, or even by several traditional primary commodities, the evaluation of the effects of devaluation must take into account the likely policies of major competitors and the implications of these collective actions for world market prices. In this connection, it is hoped that the demonstration of the relatively simple methodology used in this paper will provide a useful framework for analysis.