§ 4.42 p.m.
§ Debate resumed.
§ Viscount SIMON
My Lords, if we may now return to the question of com- 908 modities, I had the great privilege of being a member of the Select Committee whose report is being brought to your Lordships' attention today by my noble friend, if I may so call him on this occasion, Lord Roberthall. I should like to begin by paying a tribute to the noble Lord as our chairman. He guided the Committee with unsurpassable skill through a maze of evidence, and eventually led us to what your Lordships will recognise as a sound and coherent series of conclusions and recommendations. Not only the House, but certainly the members of the Committee, are deeply indebted to him.
At first glance, the terms of reference of this Committee suggested that what we were being asked to engage in was a study in applied economics—a field which I personally feel completely inequipped to explore. But as soon as we started to look at the problem, inevitably we were brought face to face with the political and, indeed, human implications of the subject. The speech of the former Prime Minister to the Commonwealth Heads of Government in Kingston was, as has already been said, a basic document for our studies; and during all the long time that we were sitting events outside, such as the preparations for the Nairobi Conference, the Nairobi Conference itself and the North-South dialogue in Paris, were reminding us constantly and forcefully of the aspirations of the less developed nations, searching for what is called "a new economic order"—I do not much like the expression, and I shall come back to it in a moment—which would give to their people a better chance of achieving a permanent advance in their deplorably low standards of living.
I say that I do not like the expression "a new economic order" because it seems to me one of those vague expressions which can mean anything or nothing: very suitable for a Party political manifesto, but not the basis of any serious discussion. Moreover, in so far as it might form a basis, it suggests a revolutionary approach to change rather than an evolutionary approach. It seems to me that if the conditions of the world's trade have been proving unsatisfactory for the less developed countries—and I believe they have—it is far better to tackle a particular place where the shoe pinches and try to rectify that, rather than to 909 start on a grandiose "new economic order".
The resolution of the UNCTAD Conference in Nairobi, which adopted what is known as "the integrated programme for commodities", expressed in general terms the objectives of the less developed world. Those objectives are set out in the report, and your Lordships will find them referred to in paragraph 2.5. This shows that stabilisation of prices is only a small part of a very much wider programme. Indeed, by itself, price stability might do more good to the industrial nations, as consumers of raw materials, than to those poorer nations who produce and sell them. That, I think, echoes a point which was made by the noble Lord, Lord Carr of Hadley.
The value of stability to manufacturers in the price of their raw materials is very great. Listening to the evidence that was presented to us, I myself became convinced that the stabilisation of export earnings, whether through the Stabex scheme, through compensation arrangements sponsored by the International Monetary Fund or by any other means that might be conceived, are of much greater value to the less developed countries than the stabilisation of prices. Indeed, if I may put an obvious example to your Lordships, if there is a country which depends almost entirely on a single commodity and it faces in one year a crop failure, that country needs urgently the increase in price which market forces will bring about because of the shortage of supplies, and if by any means the price was stabilised they might well face a disaster. Of course, this does not mean that attempts to stabilise prices to a limited extent through international commodity agreements are of no value. The Committee recommend this, and I warmly agree with them in that. We are very glad that the British Government have, through the ages, supported this idea and have shown signs of continuing to do so.
The resolution of the UNCTAD Conference to which I have already referred in fact refers to avoiding excessive fluctuations in prices, and it seems likely that international commodity agreements would offer the best chance of doing that although, as has been mentioned already, past history suggests that success is by 910 no means certain. What is clear is that, to achieve any success at all, these agreements must involve consumers as well as producers. They must be efficiently run, be insulated from political pressures and supported by adequate finance—which means in fact a great deal more than has been committed to such schemes in the past. There are, of course, other desiderata: the noble Lord, Lord Carr of Hadley, mentioned three more, and others are referred to in the report.
That brings me to say a word about the Common Fund. We on these Benches are pleased that the Government are now supporting the idea of this Common Fund It may be that their attitude at Nairobi was misinterpreted, but at the time it certainly looked like pouring cold water on a proposal that did not merit being rejected out of hand. However, now that Britain is ranged with the other industrial countries behind the concept, it is enormously important that no serious misunderstandings should be allowed to develop between the industrial countries and the less developed countries, but it seems to me that there is a risk of this.
We, with our colleagues in what is called Group B, are still talking of a Common Fund to facilitate the financing of buffer stocks and so encourage the setting up of international commodity agreements. But the Group of 77, on the other hand, see the Common Fund as—and I quote here from the paper which they submitted to the last conference:the main instrument for attaining the objectives of the integrated programme for commodities".That, as I have already said, goes much wider and includes many objectives besides the international commodity agreements.
I am not arguing that financial support on an international basis, where this is needed for these other objectives, should be withheld. I certainly hope that so far as it is able to do so Britain will contribute generously to a fund to help the attainment of these other objectives. But I feel very strongly that it would be wrong, and could be disastrous, if the same fund was used to support the financing of buffer stocks and projects included in these other objectives. Your Lordships will not want me to go through all the other objectives, but they include such things as diversifying production in developing countries, expanding the pro- 911 cessing of primary products and even improving marketing, distribution and transport systems. These are objectives which can well cost an enormous amount of money.
I feel that if they are dealt with out of the Common Fund, apart from the fact that the Common Fund would have to be very much larger, there is a real risk that it will not be successfully administered because here are two quite separate problems. In supporting the financing of buffer stocks, the Common Fund, as we see it, must be operated in a way that is based on economic considerations, entirely free from political pressures, acting as the market requires it to do in order to modify price increases or decreases caused by changes in supply and demand. The other objectives need political decisions of a very difficult kind on the priorities between one project and another, and it seems to me that for that purpose they need different types of administration and control.
May I try to clarify this thought with an imaginary example? Let us suppose that there is a boom and prices of commodities are high. In that situation, the buffer stocks are being sold, money is coming back into the commodity agreements and presumably, in so far as it has been lent by the Common Fund, is being repaid to the Common Fund. So at that stage the Common Fund is full of money, and there will be immense political pressure to spend that money on objects which may be very desirable in themselves. But if that political pressure succeeds, the result will be that when the trade cycle goes round and the prices fall, and it is then necessary for the commodity agreements to go into the market and buy stocks in order to protect falling prices, there may be no money in the kitty.
So, although I do not want to suggest for a moment to the representatives of the developing countries that we are trying to hold back, they might themselves appreciate that, if they want to get the full ambit of the integrated programme, they should have two separate funds. I hope the various richer countries would be able to contribute to them, but the funds should not be united together in a Common Fund dealing both with the stocking of commodities and with these other objectives 912 in the integrated policy. There is a great deal more that one might say, but there are many names on the list of speakers so I should just like to leave that thought with both your Lordships and the Government.
§ 4.55 p.m.
§ Lord DAVIES of LEEK
My Lords, it is indeed a great privilege to take part in this very important discussion on commodity prices. Far from being crystal gazers, we were blessed with people who have expertise in all kinds of departments. We were blessed with people who, in many cases, had spent 30 years or more in public life or in activities on the metal exchanges, on the commodity markets or in banking. Whatever attitude one might take to the report, there is no doubt, as The Times said, that the efforts were painstaking. I must say that some of the slick comments I have seen in some sections of the Press indicated to me right away that the persons who wrote the articles had hardly turned over six pages of the document before going into areas of comment which were unjustified. The articles indicated, before a couple of paragraphs were read, that people had not taken the trouble to study this great and difficult problem. Like the noble Viscount, Lord Simon, I have been so soaked in the subject that I could go on for a long time, but I shall try to discipline myself because there are other speakers who have important aspects of the problem to discuss.
But before I go into my short dissertation, I should like to add to the comments in the introduction. Without naming a lot of names, I should like to express my gratitude to our noble chairman, who conducted our discussions with care knowledge and understanding, and, if I may use the term, to the civil servant, Mr. Carstairs, who looked after us and saw that our documents arrived on time, and that most of us had an opportunity of doing our homework before we started interviewing witnesses or began making comments in private in the Committee.
The difficulty about this fascinating subject is: what does one pick out of the report that is worth while? Some of the things that shake me were evident when I was looking at today's USA World Report on the Third World, which is in the Salisbury 913 Room for anybody to read. I shall not go into the documentation of the billions of dollars that have been poured into the underprivileged areas over the period between the end of World War II and the present moment. Nevertheless, this month's Crown Agents Quarterley Review, in a sparkling but probably controversial article, headed "Is the Golden Era of Growth Over?", adds:It is now increasingly accepted that the world economy has entered a new phase of economic development markedly different from that of 25 years or so ago following World War II, and referred to then nostalgically as ' a golden era '. There are a number of significant features distinguishing the position of the world at present from those of the 'fifties and 'sixties. They include a more moderate rate of growth, a relatively high rate of inflation, a relatively high level of unemployment, fluctuating rates of exchange and a fundamentally different pattern of world payments.I shall not read any more, because it is not music to the ears of any political Party which thinks that, in its manifesto, it has the open sesame to the Brave New World. The reality is that we are going to face a world with less growth, because relatively more capital investment is needed to get the same unit of output as we had 25 years ago.
I will try to make that point clear; it is illustrated in a number of articles. Underprivileged man in the Third World is now demanding higher standards of living. He sees films and watches television, and he is demanding a higher price for his commodities. He spends some of that higher price upon a better suit, better sheets, a better home. In other words, he is raising his standard of living. Outside China, which follows its own economic programme, he regards this as the only way to try to catch up with his luckier brethren in the advanced parts of the world.
Despite cheap remarks, I was forced to the conclusion that the standards of self-discipline in the commodity markets are high—the Committee have reported that fact—and that the stick rather than the carrot is the growing supervision of the Bank of England. There are, of course, mavericks in every walk of life, but we have seen nothing miraculous to put in their place. Indeed, in a world where the gods seem to have forsaken mankind and where men no longer believe in myths, miracles no longer happen.
914 Manifestos which speak of economic and political miracles are often consigned to the waste paper basket after an Election.
We say in the introduction to our report that the instability of commodity prices—that is, of foodstuffs and raw materials—has long attracted attention since our heyday as a world imperialist Power. Many experiments took place in the aftermath of the Second World War, and we mention them on pages lxii and lxiii of our report. We mention the Lomé conference in Togo when the Common Market reached an agreement with about 46 different countries. Previous speakers have already pointed to the partial success of the Tin Agreement. There have been various meetings of the United Nations Conference on Trade and Development. For guiding principles, we have looked at the proposals which have just been spoken about regarding buffer stocks. Many of these ideas were incorporated as far back as 1948 in the Havana Charter. I remember that as far back as 1948 the noble Lord, Lord Boothby, was one of the protagonists of a very similar system to that of building up buffer stocks.
In paragraph 1.10 on page xii of the report the Committee said that it is very difficult to organise comprehensive stabilisation schemes. Paragraph 1.11 says that there are two main reasons for this. The first is thepolitical difficulty of reaching agreement among producers, let alone among producers and consumers together, because each country sees its own interest differently. As the number of interested countries grows, so too does this difficulty".The second main reason given in paragraph 1.12 is thatBritish power to influence events in this field is limited, and has changed in nature. The United Kingdom is only a minor producer of a small number of raw materials".Further down the paragraph the Committee said:Its economic position apart, Britain no longer carries its former weight as chief spokesman of the Commonwealth".When I hear rhetorical arpeggios building up regarding what we should do next, I believe that we should remember that in the Commonwealth we are just one among equals, rather than the leader. In the matter of world trade, we say that,Britain no longer has the same independent voice that it enjoyed before joining the Common 915 Market. Policy about farm output, and agricultural imports, for example, must now be EEC policy".Therefore, before we begin to consider the vital areas of our economy we must remember that no longer are they completely under the control of any Government, whether Labour, Conservative or Liberal. We had to bear these realities in mind in coming to our conclusions in this report.
The view is that Her Majesty's Government, having looked at the mechanisms for stabilising commodity prices, are treading well trodden ground and no radically new strategy on price adjustment mechanisms is likely to emerge. I believe that a tribute should be paid to Mr. L. C. Grondona, who for 50 years or more has been a pioneer. I will quote to the House from a pamphlet which he wrote many years ago, because what he said is still true today. This was that, whatever discoveries we make,our whole economic edifice rests upon the enterprise of primary producers in several fields, and so long as prices of basic commodities fluctuate widely, as they have done in the past, the entire industrial and commercial superstructure rests upon shifting sands".With a few qualifications I believe that to be axiomatic, and we should look at our problems in that light.
We have seen all the way through the political difficulty of reaching agreement. The Kingston speech which Sir Harold Wilson made showed that he recognised the need for policies in the fields of mining, plantations and investment. Whether or not we are a great Power, I still say—and the Committee came to this conclusion—that the know-how and expertise of the London markets, both the Metal Exchange and the commodity markets, are second to none. That is why I understand that, independently of the British Government, London has been chosen as the headquarters for the international commodity agreements. I receive regularly the weekly reports on the International Agreement on Tin, and the reports of the International Wheat Council and the International Sugar Organisation. Therefore, despite my rather lugubrious remarks at the beginning of my speech, there is no doubt that, because of our heritage of business know-how, London still has the opportunity to explore new areas for the first 916 time and to take the lead in trying to find an answer to the problem of stabilisation of commodity prices.
Every noble Lord knows that the oil crisis sharpened the attention of the technological world regarding both soft and hard raw materials. We have mentioned this in our report. In 1973 when the Organisation of Petroleum Exporting Countries began to jack up the price of oil, the producers of other commodities, spurred on by the example of the oil tycoons, wanted to do the same. As Time magazine pointed out in 1975, spurred on by shortages and rampant speculation at the time in the commodity markets, the prices for staples like copper, rubber, cocoa, coffee and cotton rose, and in some cases doubled or trebled by the middle of 1974. But, after the oil crisis pushed the West into a recession, commodity prices tumbled and in some cases one-third of what had been paid at the peak was now paid for them. The price upswing aggravated world inflation in industrial countries and when the downswing of prices came shock waves of discontent went through the non-industrialised world. This was the Third World, which depended heavily on commodity production income. Hence the pressure there for the same kind of cartels that the oil people use.
Chapter 1 of the report of the Committee comments on the Korean War of 1950–1952 on that boom and the yearning then for price stability in the United States of America. But Kissinger, speaking then, saidWe are prepared to discuss new arrangements in individual commodities on a case by case basis as circumstances warrant".This opened the door a little for the exploration of stabilisation deals and the USA, which did not belong to the tin agreement—29 nations did—then suggested that some new arrangements should be encouraged for other commodities. So, as I said earlier, we had the Lomé Convention.
The noble Lord, Lord Roberthall, spoke about indexation and the Committee. It was the Shah of Iran and many Third World leaders who, in 1975, asked for the indexation of raw material prices and for them to be linked to inflation in the West. The Americans did not favour this idea at the time and now our Government are 917 not too keen on it. We ourselves made a comment in passing, and, if your Lordships will look at paragraph 8.28 you will see that we said:note also that as a result of the high standing of these markets, both for their expertise and their reliability, they make a substantial contribution to our invisible earnings, estimated in a recent Bank of England Review to be of the order of f200 million a year".There is a warning there. Before we start the rapid dismantling of the system of commodity business and systems of dealing on the markets that we have in London at the present moment, let us remember that, if this is done in the transition period, we could lose hundreds of millions of pounds of invisible earnings. Too often, this country forgets that the invisible earnings made by our international expertise contribute towards helping our economy to remain as strong as it is.
Finally, I am old enough to remember the World Economic Conference of 1933. I can remember the ecstasy with which I gave lectures on what would be the results of that World Economic Conference and how we cheered and felt that the world was changing, but the sad reality of it all was that neither the World Economic Conference nor the then Kellogg Pact to outlaw war nor the then League of Nations established the kind of paradise that we hoped would come out of man's machinations and man's efforts to frustrate those who were guilty.
In our report, all of us really believe in trying to do something but we also recognise the reality and the hard work that will be needed to get the stabilisation of commodity prices for which we are asking. Before sitting down, I should like to examine where banking comes in on this. One of the threads that is difficult for us to follow is the question of the debts of the Third World. The oil exporting countries aside, nearly all the Third World countries have grave payment difficulties. No matter how big the loans made to them are, they do not earn enough to meet the current imports of necessities, or to meet their obligations on the nearly 180 billion dollar debt that they already have.
The International Monetary Fund gave a warning last month, and it was this: in the study of world credit markets released at the beginning of June, the IMF noted that the volume of international 918 lending had increased by 40 per cent. last year. It is worried about the structure of the balance sheets of the American Banks. It is not risky because of corruption. What is worrying the IMF is that, traditionally, banks spread risks, having a large number of depositors and borrowers; now, because of the pressure of the under-privileged nations, banks recycle large deposits from a small number of States, mainly the oil States. These they then recycle into loans to a limited number of under-privileged foreign borrowers. This is risky lending, but highly profitable. According to the IMF, the international earnings of 13 of the largest American banks increased 36 per cent. between 1970 and 1975. At an annual rate of 36 per cent., that amounted to half their total earnings.
America is the biggest exporter of capital; the Soviet Union has become a large borrower. While America is the biggest lender, the Soviet Union owes to the rest of the world somewhere in the neighbourhood of £930 million for the first quarter of 1977. That could be dangerous. So I would say, as the United Nations said some three years ago, that all the talk about a new economic order means new rules for international trade and new rules for economic commodities. All that is mooted at conference after conference. We had the job of looking at these matters, and we found that, rather than rushing into trying to give this House some kind of formula which has a touch of magic about it, looking at the hard work and know-how that we have developed over the years it is better to send the ship steady as she goes rather than trying to go full steam ahead into a sea which is as yet uncharted in the world of commodities.
§ 5.19 p.m.
§ Lord KISSIN
My Lords, in the first place I want to thank the noble Lord the chairman of the Committee, for allowing me to sit in on some of the Committee meetings, because as a producer, a consumer and a distributor I have a personal interest and therefore the proceedings of the Committee have been rather fascinating to me. A large section of the Press has greeted the Report of the Select Committee on Commodity Prices with the headline "A pat on the back for the commodity markets" or "Mild 919 and cautious" and some other remarks. But the subject explored by the Committee is not a subject which lends itself to headlines. It is a subject that is politically complex in our society and deserves constant research and thinking. I think it was for that reason that the then Prime Minister, Harold Wilson, made this subject the key speech at the Kingston Conference.
The Committee has taken an enormous amount of trouble and has produced a great deal of evidence and one of the most comprehensive surveys on the issues of commodity price structure and commodity markets. It has exploded the popular myth that has been created about the operations of the commodity markets, and it has rightly pointed out the numerous dangers that exist in believing that it is easy to stablise prices by promoting joint operations between producers and consumers, and that such joint operations can be achieved without complicated mechanism to the benefit of all concerned.
I want to praise the Committee for not allowing itself to be misled by these popular preconceptions. I consider it unfair to criticise the report for not coming up with a quick and easy solution for price stabilisation. After all the Committee cannot be expected to give a complete reply on such a wide-ranging subject as stabilisation of commodity prices, with which it concerned itself. How can the Committee be expected to come up with instantaneous solutions to problems that have confounded politicians and economists for years and years? All the Committee can be expected to do is to assemble evidence as to the causes of fluctuations of commodity prices and offer its views on the various schemes that exist to improve the stability of these prices.
The fact that commodity prices have shown themselves to be a lot more unstable than prices of other goods and services has been a subject of major concern to Governments all over the world. A sharp rise in commodity prices fuels inflation in industrialised countries, while a sharp fall in prices can severely reduce the incomes of producers in developing countries. The Committee has analysed extensively the operations of three elements which are said to 920 influence the stability of commodity prices. It has investigated the operation of the commodity markets, it has analysed the role of speculators, and it has given extensive consideration to potential agreements between producers and consumers in regard to buffer stocks and in regard to other measures for price stabilisation.
The report has rightly accepted the fact that basically price fluctuations are not the result of any peculiarity in the markets themselves, but rather a reflection of the supply and demand conditions. These are different from those which prevail in the market for manufactured goods. It is clear that shifts in demand, but more usually actual and expected changes in availability of the commodity on the world market, will have a disproportionate effect on the market price. Traditionally the markets have reacted to these changes in demand and supply, and have set a realistic price at which the producer can find an instant buyer and the consumer an instant seller for today, for tomorrow, or for a year ahead. By harmonising prices in this way the free market provides an essential, and I believe an efficient, service to both consumer and producers alike. Schemes which are introduced in order to stabilise fixed prices affect the efficiency of the market. In the long run it must be obvious that sudden shifts in supply and demand cannot be controlled by agreement unless agreed prices are kept in line with market conditions. If not, any scheme aimed at stabilisation is likely to break down.
We have heard in our lifetime endless reproaches from producers and consumers that market speculation is responsible for sharp fluctuations in commodity prices, but, my Lords, the term "speculation" is very wide. If we define the speculator as someone who takes a vew of the future, then in this sense he is no different from the producer, trader or consumer, who uses the futures or terminal markets to hedge or to protect himself against uncertainty. This form of so-called "trade speculation" must be substantial, but why should it have an unsettling effect on the markets? The Committee rightly points out that "outside" speculation may accentuate price movements in certain circumstances, but there is no evidence to suggest that it 921 is by itself a dangerous factor to the stability of the markets.
One has to realise that if the markets are to function effectively they must provide a broad and active trading medium which can be utilised by the trade at all times. The report confirms the view that the speculator plays a role in helping to create a volume necessary for an active market through his willingness to accept risk. In my view—and this is a widely shared view—the producer and consumer alone cannot provide sufficient volume for a viable market. Accepting the fact that speculation makes a positive contribution to the operation, the report rightly draws attention to the need for safeguards against excessive outside speculation. I support the Committee's view that there is a definite need for all markets to adopt some sort of clearing house or financial control system similar to the one that operates today in the market for soft commodities such as coffee, sugar and cocoa.
The Committee refers to the London Metal Exchange. While I am aware that supervision of the commodity markets by the Bank of England exists, I am not convinced that there is not a need for the adoption of stronger financial measures for other markets. I know that the London Metal Exchange has given considerable thought recently to a method of monitoring schemes which will limit certain firms' exposures to the Ring, and thus eliminate the possibility of a domino effect. I, for one, believe that the view expressed in the report demands more efficient measures, because there is undoubtedly a danger of financial collapse on this particular market when companies hold enormous numbers of contracts. The sums controlled are enormous, and, as the Committee says, most principals who use the London Metal Exchange are sizeable firms, but some may not be so strong and the dangers are greater than is generally appreciated. In my view, the argument put forward to the Committee, that a clearing house would be unworkable because of the high cost involved in expensive metals, is, surely, no longer quite as valid as it was when it was put forward, particularly since the gap between soft commodities and the metal prices has narrowed quite significantly.
922 I think the London Metal Exchange should study the implied criticism of the report and give further thought to some sort of financial control or clearing house system, because the measures that they are proposing to take, in my view, provide for insufficient financial controls and in that sense are half measures. The task of every terminal or commodity market is to safeguard financial security of that market, because a failure in any one of our markets would undermine the credibility of all our markets. The market system today brings to London, as has been said, £200 million in direct earnings, but how much does it bring in in ancillary earnings through insurance, shipping and banking?
I should like to refer to the twin problem of price stabilisation and income stabilisation. In my opinion, it has in the past proved impossible to devise a scheme which reconciles totally the interests of the producer and of the consumer. Obviously consumer countries will always press for lower prices, and one must bear in mind that their concern about prices often stems from their inability to control exchange rates and prices rather than from any peculiarities in the markets themselves. On the other side of the coin, the Governments of the producer countries, which are largely developing countries, will always have a natural bias towards higher prices, and one must remember that the vulnerability of developing countries to fluctuations in commodity prices varies a great deal from country to country.
Given these constraints, the report rightly implies that it is an impossible task to try to stabilise with one single scheme the whole of the world commodity markets. It appears to me totally convincing that the Committee's view to tackle the problem of stabilisation by dealing with individual commodities on a product by product approach is the only method which has a reasonable chance of success. There are supply agreements which work, but they are based on the fact that there is a limited number of sellers and consumers, and as they are limited they are more likely to be forced to adhere to the agreement. However, even these agreements are not always shockproof and they have the tendency to break down. When prices fall on the market sellers tend to break rank and sell their own product as quickly 923 as they can. When prices rise the reverse takes place. We have seen many cases when neither party can be relied upon to fulfil its commitments.
When major producers try to go it alone there are ways in which they can raise and hold prices. Following the apparant success of OPEC there have been many recent calls for concerted action among commodity producers. However, I am convinced that the majority of these agreements tend to collapse when prices fall and the inevitable scramble begins to sell one's product. Admittedly, OPEC itself has certainly improved the producers' position to a degree which is not shared by other commodity producers, but there are some very obvious reasons for that.
OPEC commands a virtual monopoly over low-cost oil. It has little to fear from the competition in substitutes. However, even OPEC is not as effective as one might assume, because some of OPEC's major suppliers have, as we now see, no need for immediate revenue, but OPEC also includes other substantial suppliers who totally rely on immediate revenue. The unity of interest between these differing economic and political entities has produced major conflicts inside OPEC because the cost of cutting production and sales has different effects in different producer countries.
The Committee has given extensive consideration to the possibility of international commodity agreements run jointly by producers and consumers. Using export quotas or buffer stock methods which are intended to stabilise prices may come closest to satisfying the needs of both consumer or producer. These schemes are obviously only feasible for a limited number of commodities, and even then there are inherent dangers in these schemes. There is the problem of deciding the price range. Buffer stocks would have to be large enough to give a reasonable expectation that agreed ceiling prices can be defended.
However, there is the danger that if stock piles are too large they may result in prices being held down for a period long enough to cause hardship to producing countries and also to stifle the development which is necessary to ensure future supplies. The Committee rightly points out that 924 such a scheme is likely to break down if the agreed parameters of prices fail to reflect changes in market conditions. Producers will tend to maintain price levels which are fixed at a point above the equilibrium level in a way that could lead to an enormous build-up of stocks. The consumer would then be in the very unenviable position of having to pay, through taxation, to help finance the carrying of such large stocks as well as having to pay a high price for the commodity. This state of affairs exists currently in the EEC where consumers are financing inefficient farm production while at the same time they are forced to pay high food prices.
It appears fairly obvious that buffer stocks are only practical in commodities when the volume of trade is small and the market is relatively restricted. When the volume is large, the cost of carrying enormous quantities of stocks must exceed the benefits that accrue from the attempt at price stabilisation. America, which advocated the buffer stocks recently in Nairobi, has just proposed the postponement of the implementation of its own proposals for sugar and grains.
One naturally sympathises with those developing countries whose economic development is dependent on the export of one or two basic commodities. I feel that intervening in the commodity market is, on the whole, not the best way of channelling international aid. A more useful approach to the problems facing such producers could be found if the IMF or UNCTAD were to give increasing financial encouragement to developing countries to set up their own income stabilisation scheme, similar to those that operate in advanced primary exporting countries as, for instance, New Zealand. This approach could more easily take into account the varying needs of producing countries. A further advantage would be that it would not interfere with the efficiency of the market mechant ism. The final and direct advantage would be that it would give developing countries direct incentives to improve the efficiency of their own production and to link, wherever possible, the support with the diversification of their production programme.
We are all aware of the endless attempts that have been made at involving Governments, producers and other agencies in 925 bringing into effect controls over commodities and commodity prices. Although trading units increase in size and Governments try to trade with Governments—a process which has not always been very successful—the international commodity markets have proved their validity in remaining the best medium for free trade. By recognising that fact, the report has put the right emphasis on the various problems that surround the complicated stabilisation problems. It has paid the attention to the commodity markets that they deserve, but at the same time it has laid down the requirements under which it considers that the markets must operate. Those responsible for the markets should take good note of these requirements and satisfy themselves that their regulations are fulfilling the needs which a sound mechanism requires. The report lays emphasis on the fact that, given the right volume, the existence of independent markets remains essential to all parties concerned with trade in commodities. It draws attention to the need to encourage the participation of so-called speculators, and recommends that methods should be taken to control their participation.
The report rejects the notion that market speculation is primarily responsible for instability of prices. However, it also rejects the notion that by agreements between producers and consumers, the problem of stabilisation can be solved in one clean sweep. It expresses its doubts as to the usefulness of buffer stocks as an overall solution and explains the difficulties which must be solved in order to make them constructively effective for certain commodities. My Lords, the report has given an ample survey of all the existing problems and provokes ideas for thought. I should hate to think that this report, so methodically prepared and designed, will disappear on the shelves of our libraries. I genuinely hope that it will generate further thinking and more positive action by the various institutions and agencies concerned with the problems, towards the solution of those problems which, in the view of the Committee, are not beyond our capabilities to solve.
§ 5.38 p.m.
§ Lord WALSTON
My Lords, I share the high opinion expressed by the noble 926 Lord, Lord Kissin, and the noble Lord, Lord Carr of Hadley, concerning this report. It is a most valuable document prepared in a most lucid manner and making this extremely complex subject intelligible even to a layman such as myself. I am most grateful especially to its chairman and also to its members for the work that they have put into its preparation. When I think about commodity problems and discuss them with other people I notice that often people are trying to reach very different objectives. I have a variety of objectives and I think that it is valuable to mention them at the outset in an attempt to clarify one's aims and to see how close one can get to achieving them.
Clearly, one of the objectives of stability in commodity markets is to ensure continuity of supply at stable prices for the consumers which are, by and large, developed countries, manufacturing countries, consuming countries and specifically ourselves. That is of enormous importance to us. Secondly, it is also important to us and to the developed world as a whole that the developing world should have some assurance of a certain level of income—especially, if possible, an income above that which they have at present—which, purely from a point of view of self-interest, will provide a larger market for our products and those of other manufacturing countries, thereby giving us greater profits here and greater potential for employment. That is a second objective which can be obtained by improving the present situation in the commodity markets.
Thirdly, there is the purely political objective of increasing the political stability of the Third World, thereby ensuring that it does not fall prey to the blandishments of our enemies and alien ideologies, because undoubtedly the more unstable it is and the greater poverty that exists there, the easier it is for them to turn away from us and either militarily or economically deflect from us those commodities which they produce and on which we depend. Fourthly—and to the mind of many of us this is far and away the most important—there is the purely moral aspect of doing what we can within the realms of political possibility to diminish the ever-growing gap between the rich countries and the poor countries. In that context I am very glad to see that 927 the report points out that a rise in commodity prices has, in fact, a very small effect indeed upon inflation in this country and that we should not be deterred purely on those grounds from advocating both stability and to some extent an increase in commodity prices.
If they have not already seen it, it is worth drawing the attention of noble Lords to a small item published in The Times today where a report is mentioned which states that the United Kingdom consumer today consumes 30 to 40 times the total resources that are consumed by the inhabitants of some of the poorer developing countries. That is simply an indication of this ever-widening gap.
With his customary honesty and frankness, the noble Lord, Lord Carr of Hadley told us just where he stood with regard to prices and of his belief in the market mechanism as being the correct criterion—the best and most effective way of determining prices. However, he went on to say that he agreed that, in certain cases, there was a need to modify the effect of the market mechanism. I shall be equally frank and say that I am in fundamental opposition to the noble Lord. I do not believe that in these days the market mechanism is the best or the most efficient method of determining prices, because I think it is inefficient economically. I believe that it leads to a misuse of resources; it leads to a squandering of resources. The free play of the markets has led to over-fishing in our oceans. It has led to the dust bowls in the United States and to the destruction of coffee and grain in the 1930s. It has also led to an undue reliance on oil, to too small investment in research into other sources of fuel and into other technical methods of extracting fuel from the earth. We are suffering from that now because we have relied unduly on the market mechanism.
I believe—and this is most important—that the market mechanism is essentially unjust because it means that prices are determined, not on cost of production or on needs, but purely on the bargaining strength of the two parties to a deal; that is, the producer and the consumer. If the producer happens to be in a strong position, he can demand his price; if the consumer 928 happens to be in a strong position, he can do the same.
We saw what happened in the last century in the matter of bargaining over wages, when the employer was in a strong position and the worker was in a weak one; we saw the grinding poverty and exploitation that resulted from that. We are seeing it in a somewhat different form today when the unions are in a strong position. Even though the industrialist may not be in a weak position, the consumer is in a weak position. Therefore, we have injustices and inequities there. We see it on a world scale in the growing disparity in wealth between the rich nations and the poor ones, because the rich nations are in a stronger position and the poor nations are in a weaker one. Therefore, the gap grows ever wider. For those reasons I believe that the market mechanism is essentially an inefficient and unjust mechanism.
Having said that, I am not perhaps quite so far from the view of the noble Lord, Lord Carr of Hadley, as I would appear to be from what I have said. I do not believe that prices can be established by a few gentlemen—even ones as eminent as the noble Lord, Lord Kaldor—sitting in their ivory towers and deciding what the price should be. Some attention must be paid to the market needs and to the likely over-production or under-production.
Therefore, in a realistic way in our attempts to bring stability to the commodity market we must aim at a system whereby long-term economic trends—that is, supply and demand—are taken into account but where producers and consumers alike are cushioned against the violent short-term fluctuations. Here I think that the noble Lord, Lord Carr of Hadley, and I are getting close to common ground. But as the years go by I believe that our differences will appear far more marked. However, at present we both agree that that is what should be done.
As this very valuable report points out, various methods have been tried with varying degrees of success (unfortunately, most of them with very little success) and various other methods have been suggested. To my mind the most effective methods are as follows: first, and where possible, long-term contracts between consumer and producer; secondly, buffer 929 stocks of one form or another; and, thirdly, possibly running in conjunction with that, a system borrowed from the Community—namely, the Stabex scheme—whereby the overall earnings of a developing country have some guarantee against violent fluctuations themselves. In many cases I believe that something can be worked out for the different commodities along these lines.
However, on buffer stocks, which have many attractions, I would make two points which are absolutely essential. First, we—and by "we" I mean the developed and consuming nations—must not give an open-ended commitment. The noble Lord, Lord Kissin, referred in passing, to the Common Agricultural Policy. We learn from that of the appalling distortions and economic non-senses which can arise when producers, whether they be producers of agricultural products, metals or any other prime commodity, are given an open-ended guarantee. Then, of course, production is encouraged to an undue extent and unmanageable surpluses arise. Therefore, if there are to be such things as buffer stocks there must be a system whereby the liability to purchase is limited in some way or another either to quantity or to price.
The second point which to my mind is also of great importance is that there must be for the alterations in price for the buffer stocks—both the selling and the buying—some automatic system of decision-making on the lines suggested either by the noble Lord, Lord Kaldor, or Mr. Grondona. Mr. Grondona has been referred to frequently and I should like to say in public that I have had for many years, and still have, the greatest admiration, for both his ideas and his devotion to this complex subject.
If we are to have buffer stocks, the decisions about when to buy and sell cannot be left to a group or a management committee, however skilled and able. They certainly cannot be left to periodic haggling between the governments of the poor and the rich countries, the producers and the consumers, and thereby inevitably agreed or disagreed to as a result of political haggling and various pressures which have nothing to do with the facts of life. There must be some automatic adjustment in prices so that, 930 if stocks rise above a certain level, the price will automatically fall by a given percentage, and vice versa. I do not think that it would be right at this stage to continue any further with this absolutely fascinating subject, or to attempt to go in any more detail into the various methods which could be adopted, most of which have been very ably described in this report. All I would do in conclusion is to urge upon Her Majesty's Government to do more than take note of this report. They should do more than say that this is valuable and interesting; they should actually and within a short period of time produce concrete proposals based on the facts which are given in this report and based on the avowed intention of bringing stability into the commodity markets for reasons of social justice, economic advance and political stability.
§ 5.53 p.m.
§ Viscount AMORY
My Lords, as it proceeded with its work, your Committee realised that it was exploring a well-trodden field. The documentation is enormous. As the noble Viscount, Lord Simon, said, our investigations carried us into realms of commerce, economics, politics, ethics and ideology. Nevertheless, I hope that the House will conclude that the report we are debating is a thorough, conscientious and fair examination of the sector covered by our terms of reference, and that the number and variety of witnesses we heard or read is impressive.
Throughout, we had to keep reminding ourselves that our terms of reference were narrow and specific, being related only to the problems of instability of prices. There were therefore many subjects and many sectors of the field which were of great importance but which were outside the scope of our studies; namely, aid to the poorer countries; instability of export earnings; the need for economic development and diversification, and national and international currency problems.
It became clear that questions of aid must be considered separately from schemes of stabilisation which are aimed simply at stability of prices. On our particular subject of instability of prices, I confess that, as we got deeper into our examinations, I became as a member of the Com- 931 mittee, more and more impressed with the complexities of the problems. Every commodity calls for individual treatment. Each has quite different price trends. Most, if not all, are subject to unpredictable hazards and influences. Some are storable, some are not. Some commodities are produced partly by relatively poor developing countries and partly by highly developed ones. I was surprised to find how few were produced exclusively by the really poor countries, though where-ever a particular commodity was, it was clearly of dominating importance to the economy of that country.
It became obvious that international commodity agreements—ICAs as they are called—by themselves are not likely to be a panacea for all commodity troubles. Equally, the Committee felt sure that, in spite of the not very successful results to date, ICAs have a potentially valuable part to play in suitable cases, and that renewed efforts should, therefore, be made by producers and consumers jointly to work out schemes to which both should contribute. Each individual scheme should be as autonomous as possible, though Governments should give such schemes positive encouragement.
Buffer stocks, if storable and large enough, as Pharaoh found, are, within limits, a sensible way to even out problems of supply and demand. From experience to date, floor prices are easier to secure than ceiling prices are to maintain. Price changes are healthy and essential if supply and demand are to be equated. But, when once stability has been properly defined in terms of price movements, then excess instability is seen as a positive evil. The historical evidence is interesting, but, except for two short periods, commodity prices have not been so unstable since the war as they were between the wars. I think that the noble Lord. Lord Roberthall, pointed that out.
The Committee was extremely sorry that it had to conclude that Mr. Grondona's ingenious, comprehensive and imaginative scheme for buffer stocks on a national basis would be impracticable in current circumstances. But the "passive" —automatic—characteristic of his scheme of buffer stock management is an attractive feature of his proposals, as I think the noble Lord, Lord Walston, indicated.
932 The Committee was impressed by the evidence given by witnesses of the gravity with which political risks are regarded by investors, particularly in the case of commodities like metals which involve a long time-scale. Where there is a risk of the rules being changed unilaterally and unpredictably, long-term investment will be frustrated. The Committee was interested in the possible idea of an International Resources Bank, as suggested by Dr. Kissinger, with its operations governmentally supported or underwritten. It felt that such a bank would be a tremendous help in ensuring stable treatment by the benefiting countries. Some method of protecting investment from the vagaries of changing political attitudes would be very valuable indeed.
We concluded that any general scheme of indexation with the aim of stabilising the prices of primary products in real terms would be too difficult in practice. The noble Lord, Lord Roberthall, mentioned that. It was interesting that a committee of experts set up by the Secretary-General of UNCTAD to examine indexation did not find it possible to present an agreed report. The diagram on terms of trade on page 66 is revealing as indicating that the worsening of terms of trade against the producers of primary products is at any rate rather less than is sometimes believed.
In Chapter VIII the report pays tribute to the commodity markets—several noble Lords have referred to this—in particular in the final paragraph of that chapter. The evidence of the professional skills with which they are managed and of the useful services they provide is very impressive indeed—and the noble Lord, Lord Davies of Leek, referred to this. The report in the same paragraph rightly mentions the valuable contribution, of no less than £200 million, which these markets make to the invisible earnings of the United Kingdom. Lord Davies regarded that with "ecstasy", and in my view it is well-founded ecstasy.
We found difficult the question whether speculation helps or hinders the stability of prices. It seems that some speculation may in fact be beneficial, and often is, but that an excess of uninformed speculation may be harmful. We were glad to hear that the Bank of England keeps in very close touch with these matters. I 933 might say in passing that I have a good deal more respect for the market system than has the noble Lord, Lord Walston, but perhaps that is not surprising as we gaze at each other from opposite sides of your Lordships' House. However, I agree that it can work too harshly and that, when it does, it calls for wholehearted efforts to mitigate its harsh effects.
I know that every member of the Committee will wish to express gratitude to our chairman. His expertise as a distinguished economist and the consideration he has given to these problems over many years made him an invaluable guide to the Committee. How fortunate we were, too, in our specialist adviser and in those excellent officials of your Lordships' House whose professional services were, needless to say, of the highest quality.
I have already apologised to Lord Roberthall for my inability to remain till the end of the debate because of another firm commitment of which he knows. I believe the Select Committee has been able to produce a report which will be widely recognised in many countries as helpful and impartial in its conclusions. The study of the problems of price instability, which was the subject entrusted to it in its terms of reference, is difficult and complicated. When I read the note at the bottom of page 20 I felt proud to have been a member of a committee capable of such erudition.
§ 6.3 p.m.
§ Lord SEEBOHM
My Lords, at this stage of the debate most of the points I wished to make have already been made and I find myself agreeing almost entirely with everything noble Lords have said, with the exception of the noble Lord, Lord Walston, who said a few things with which I disagreed profoundly. There are only two points I wish to stress and therefore I will not delay the House for long.
Let me say at the outset that this is not a purely economic question. It concerns the whole relationship between North and South, between the rich and poor, and it is a highly emotional matter. The unfulfilled hopes that were raised at Kingston in 1975 and the somewhat deafening silence between UNCTAD IV in 1976 and March of this year could be the forerunner of a real breakdown in confidence 934 between nations and have very serious political consequences unless something is done. I therefore welcome the Committee's report, which seems to be a very comprehensive and well-balanced study, and I add my congratulations to those expressed by other noble Lords.
As I said, there are two points I wish to stress. First, I strongly recommend the setting up of a Common Fund and it seems that Her Majesty's Government's thinking on this has moved a long way since Nairobi. I strongly agree with what the noble Lord, Lord Carr of Hadley, said about this matter, particularly the point he made about economy from having a common fund and, as the noble Viscount, Lord Simon, said, this is a very important factor and could in fact reduce the cost of setting up commodity agreements by a very large sum. I also believe that the loans, or whatever they will be called, should be interest-free because if a commodity is keen and is run well it buys at the bottom and sells at the top and should make money, so money could be returned partly from profits and partly from selling when the price is high.
I believe that the principle of international commodity agreements is right, but nevertheless I do not believe that all the inherent difficulties of reaching agreements between producer and consumer will easily be overcome and that disappointingly few will be established in the foreseeable future. I also agree about the importance that the noble Lord, Lord Roberthall, mentioned of getting good information. This is a vital matter in stabilisation, but unfortunately there is another element we must consider—one might refer to them as acts of God—in that nobody can foresee a frost such as happened in Brazil a year ago, or two droughts running which completely destroyed the groundnut farming industry of Northern Nigeria.
That brings me to my second major point, which has been raised by several noble Lords, and is the result of rather changing my opinion since I gave oral evidence to the Select Committee. I have attended two international conferences since then and this subject of commodity agreements was discussed at some length at both of them. It was felt at them that the need for developing countries was 935 best described as the stabilisation of foreign exchange earnings. While international commodity agreements were part of this, something else was necessary in both the short and long term. Commodity agreements, in my view, are likely to be more beneficial to the individual farmer or producer than to the country itself. It was pointed out that the rise in the price of coffee into the stratosphere did no good whatever to Brazil, which did not have one bean to sell. It was further pointed out that some countries with several commodities—for example Malaysia with cocoa, rubber and tin, and Nigeria with much the same and now of course with fossil oil—could face the collapse of one commodity with equanimity provided the others were firm.
It is this problem of stabilising total foreign exchange earnings that is the core of the matter and this, if it is to be faced at all, involves extending the use of the existing compensation fund under the aegis of the IMF. Under this scheme developing countries should establish a reference figure of earnings with the IMF and should be offered interest-free loans in years when those earnings fall below such reference figure, to be repaid when earnings recover. Hopefully, this would be a revolving fund, but no doubt there would be defaulters from time to time and that would have to be accepted. Once a loan had been taken, I would expect the IMF to exert some kind of discipline to see that imports were also regulated in a responsible manner.
During the 20 years I have spent operating in the developing countries I have seen some almost brought to their knees by importing goods of little or no social or economic necessity. A system of income stabilisation of this kind could allow the developing countries to make financial and economic plans that had at least some relation to reality and could be of far more use than some of the aid that has been available in the past. It would also get away from the atmosphere of patronage and charity which can be so resented by the recipient.
I must refer to the opportunity of forming a world commodities centre in London. In the report the Select Committee was kind enough to refer to my oral evidence on the subject, but felt 936 it would have little, if any, effect on commodity stabilisation and therefore made no recommendation. In my view, that is only partially correct. A sub-committee of the Parliamentary Group on World Government has made a detailed study of the matter, and we believe that if all the dozen or so international commodity associations and study groups were concentrated in London in a purpose-built centre with adequate facilities for conferences and offices, matters could move much faster and there would be an international forum of a continuous and continuing kind on a great number of subjects which could be of enormous value to the developing countries and to the United Kingdom.
I think that the noble Lord, Lord Davies of Leek, was anxious that there should be some start, some initiative, by the United Kingdom in this matter, and this seems to me something that we might well start. Those who are already here—there are about five or six of them now—bring to this country a large part of those foreign exchange earnings of £200 million, as has already been mentioned, and was described in the Bank of England's Ouarterly Bulletin in March. If all were here, this figure could be doubled or trebled when a few more Community agreements become operative. While the cost of building such a centre from scratch might be in the order of £10 million, it would bring in rents which would certainly offset a considerable part of the cost, and it would show the developing countries, and in particular those in the Commonwealth, that what we said at Kingston and Nairobi was not meaningless. I doubt very much whether the actual cost would be non-economic, even from the start taking into account the foreign exchange earnings. Let me end by saying again how excellent I find the report, and how much I hope it will lead to action.
§ 6.11 p.m.
§ Lord KALDOR
My Lords, I should like to add my congratulations to the many others extended to the noble Lord, Lord Roberthall, and his colleagues for having produced such a scholarly report in so short a time, after taking such extensive evidence that was most valuable. I myself had the privilege of attending 937 some of the meetings when evidence was taken, and I learnt a considerable amount from them about the way in which people who operate commodity markets, or are interested in commodities, look at the matter. Except on one major point, which I shall consider in detail, there is little in the report with which one could positively disagree. At the same time, I cannot help echoing the sentiment expressed just now by my noble friend Lord Walston that the report missed an important opportunity. It conveys the general impression that little can be done by way of a major or comprehensive reform, since each commodity has peculiar features of its own, and it is best to avoid the use of general remedies which are based on broad distinctions, because every broad distinction has an exception. One can find an exception to almost any proposition made in the field of economics or in the social sciences.
One is left with the impression that in the Committee's view the problem of the stability of commodity prices is not as important as it is often thought to be and that in so far as it is an important problem one should not expect that anything much can be done about it, although there is obviously scope for improvement in various ways and in specific cases. One of the Committee's more remarkable conclusions is that,commodity markets do not in themselves represent an inherent destabilising influence on commodity prices.The obvious question this invites is, "As compared to what?"
Clearly, the prices of all commodities which are dealt with in commodity markets are very much more unstable than prices of all commodities which are not dealt with in commodity markets, and where production and consumption are kept in balance in some other manner; for example, motor cars, refrigerators, men's shirts, and millions of other items that I could quote. The efficiency of the market mechanism, in keeping a balance between supply and demand or production and consumption, has a clear measure. It is to be measured by the amount of price variation that is required in order to bring about any given adjustment in the underlying conditions either on the side of demand or of supply.
938 Judged by that test, commodity markets represent a remarkably inefficient instrument for the fulfilling of the function of keeping production and consumption in balance, since even small changes in underlying conditions are capable of causing large variations in prices, and all variations in prices contain an unnecessary fortuitous destabilising element; namely, they redistribute income in a haphazard way between the different parties. They make some people poorer and other people richer, as a by-product of adjusting supply and demand, which is not an inherent or necessary part of the situation. It is a cost that we have to pay in order to use the price mechanism as an adjuster.
In my view, the committee failed to grasp the important implications for the world economy of the very existence of basic differences in the production and marketing of primary commodities on the one hand, and of manufactured goods on the other hand. The Committee failed to appreciate that industrial countries can prosper only if they are assured of adequate supplies of food, fuel and raw materials, which are their essential input. Finally, the Committee failed to appreciate that most of the troubles in the last century and a half, which resulted in world-wide economic crises—whether these crises were combined with a major inflation, as now, or a major deflation, as after 1929—could be shown to have had their origin in the failure of the adjustment mechanism which keeps the growth of supply in primary commodities in due relation to the growth of requirements, as determined by the growth of world industrial production. World industrial production cannot grow faster than the expansion of the food and raw material base permits.
In particular, the Committee failed to appreciate the importance of the fact that both sharply rising and sharply falling commodity prices can be the cause of a recession and mass unemployment in the industrial countries, and can also be a major cause of inflation. Indeed, the Committee dismisses this latter view in one brief sentence, by saying:Fluctuation in commodity import prices, apart from oil, seem a minor element in the rich nations' inflation problem.The Committee then quotes the example of Germany, which is much dependent on imported food and materials, but where there is very little inflation. I consider 939 this example a particularly inept one, since Germany opted out of world inflation only by repeatedly appreciating her currency, thereby aggravating the inflationary problem of other less fortunately or, financially, less strongly placed countries.
However, the Committee's view in these matters is certainly not the generally accepted view of economists, or even of the major Governments of the Western World. Thus, President Carter in presenting his anti-inflationary programme on 15th April this year, made prominent reference to the potential role of international commodity agreements in contributing to the battle against inflation in the United States. He said:When prices of raw materials and food fluctuate upward, the effects tend to spread throughout the economy, raising prices and wages generally … Reducing fluctuations in commodity prices therefore helps to reduce inflation … My Administration will enter into negotiations for international agreements for grain and sugar to reduce fluctuations in prices. We will also consider with an open mind other commodity agreements that concentrate on moderating price fluctuations.Subsequent to this statement, this theme was enlarged by the testimony to a committee of the United States Congress by Mr. Fred Bergsten, who is a United States Treasury Assistant Secretary for International Affairs. I should like, with your Lordships' permission, to quote at some length from Mr. Bergsten's statement, because it puts the very point which your Lordships' Committee failed to appreciate in a far better way than I could in my own words. Mr. Bergsten said:Sharp fluctuations in the prices of primary commodities, both agricultural products and industrial raw materials, have been an important factor in triggering and sustaining inflation. Inflation, in turn, has triggered increased unemployment. There are two reasons why commodity price instability has added significantly to these problems.First, excessive rises in commodity prices, even when they are temporary, induce economy-wide price increases beyond the direct impact of the commodity prices themselves. This is because producers of manufactured goods and food processors often justify additional increases in their prices on the basis of cost increases stemming from rising prices for their raw materials. However, these increases are not likely to be withdrawn when raw material prices subsequently recede. The effect is a ratcheting up of the general consumer price index, which in turn provides justification for higher wage increases. As inflation 940 spreads, for this as well as other reasons, inflationary expectations then generate additional demand for business inventories and create fears of impending shortages, provoking protective purchases and forcing raw material prices up even further in a spiral which, as we saw particularly in 1973–1974, can be devastating.Second, excessive price declines for commodities can also, paradoxically, fuel inflation. When such declines are precipitate and extended in time, they can deter investment in new productive capacity at both the primary and processing stages. Supply may then become inadequate to meet the normal growth of demand in future years, pushing prices up at that time.Mr. Bergsten then comes out strongly in favour of buffer stocks as the only satisfactory method that would meet the needs of the importing countries, or the consuming countries, for greater price stability, and also stimulate investment and thus adequate future supplies by assuring a remunerative price to producers; and which, in contrast to other methods, such as quotas and production controls, would allow price to perform its function of allocating resources to the most efficient producers. He concluded his statement by saying that the present US Administration believe that international commodity agreements are important from the point of view of moderating inflation in the United States.
This is far ahead of any official statement made on behalf of Her Majesty's Government in this field. On this matter, the thinking of the Americans is much ahead of ours; and, as the Committee shows in its chapter called "Policy of HMG", while the British Government put forward far-reaching proposals for the creation of international buffer stocks immediately after the last war—largely, I believe, under the personal influence of Lord Keynes, who was then in the Treasury—they have been dragging their feet on this matter ever since. Apart from the rather vague initiative taken by the previous Prime Minister in Kingston in May 1975, which was not really followed up, the attitude of Her Majesty's Government in the view of your Lordships' Committee wastoo negative in general and open to question in several particulars.They were opposed to the creation of a Common Fund, which the new United States Government supports; and your Lordships' Committeeconsider it unfortunate that the UK has until very recently given the impression of so cold a welcome.941 The Committee note that this attitude has changed now as a result of recent meetings in Geneva and in Nairobi, and our Government are no longer opposed to the establishment of a Common Fund.
In my view, however, both the Government and your Lordships' Committee considered the problem much too narrowly; merely as a method of helping the producing countries, and not one which is of major importance to the consuming countries. At least, in reading various official statements made I looked in vain for the aspect of helping consuming countries, like Britain, and other industrial countries, as distinct from primary producing countries. The Committee themselves took the general line thatalthough some reserve of capacity is desirable … there is a general presumption against keeping any substantial part of resources idle for any length of time".I wonder whether they would also think that the international Gold Standard of the 19th century and the early part of this century was a wasteful system because it tied up so much valuable gold as a monetary reserve. In my view, if the world succeeded in creating an international monetary medium which is directly convertible into major commodities and the value of which is therefore perforce and necessarily stable in terms of basic commodities, this would confer an inestimable boon on the world economy, both in terms of monetary stability and in terms of enhanced economic growth, in relation to which the cost incurred in holding larger stocks of basic commodities, and the wealth which is tied up in that form, would appear insignificant. However, the Committee regarded such far-reaching proposals as:outside the purview of the Committee".Yet there is need for a committee, my Lords, whether it is set up by the Government or the Parliament of this or some other country, or whether it is set up by a number of Governments through an international body, which would examine in depth the problem of world inflation as it now presents itself, after any formal link between money and gold has been abandoned and when monetary stability is the privilege of only one or two countries in the world, such as Switzerland and Germany, who are able to offset constantly 942 rising world prices by raising the exchange value of their currencies in relation to other industrial countries. In other words, these countries manage to opt out of world inflation but only (I have not the time to develop this theme) at the cost of aggravating inflation in the rest of the world.
In the matter of inflation we are living from hand to mouth, trying to cope from month to month and from year to year by means of one temporary expedient after another. There is no world authority regulating the supply of money, and, personally, I am extremely dubious whether inflation in the world could be banished by some simple means such as the establishment of a global, yearly money-supply target for mankind. Indeed, I am dubious whether inflation can be got rid of simply by regulating the amount of financial claims which the public holds against certain privileged financial institutions—the so-called clearing banks in this country—to the exclusion of other financial insitutions, which is the label attaching to that mysterious and amorphous substance which it is now fashionable to call "the money supply".
§ 6.30 p.m.
§ Lord THOMAS
My Lords, may I be allowed to confess that one of the main reasons why I put my name on the list of speakers was to make sure that I had on record my opinion of what an invigorating, inspiring experience it is to be on one of these Parliamentary Select Committees. I have spent most of my years—too many of them—with my nose too close to the grindstone of industry and, like many uninitiated businessmen, I thought that Parliamentary Committees were held at stratospheric levels in a thin partisan atmosphere. Experience shows that that is not so. We were steered and encouraged by an obviously hard-driving, fully experienced chairman. We were served by a secretariat that had a keenness of purpose, honed to a sharp cutting edge, that put our workings in orderly fashion. The very businesslike way in which the Committee which produced this report was run was most inspiring. The cross-fertilisation between the Members of the Committee and the witnesses was most interesting and encouraging.
943 The time and effort spent on this report and the debate this afternoon will benefit worldwide. I do not propose to go into the detail or to give my own views. They are, I hope, in the report itself. All I know is that it is pro bono publico and the fact that it is already beginning to have influence is shown by a paper I received from the Federation of Commodity Associations who say that since they gave evidence before the Committee, the Bank of England and the London Metal Market have already put into action certain practices which are recommended in the report. They have put forward a scheme for monitoring and computing figures which will have the effect of producing quicker and more comprehensive information. I hope, as the noble Lord, Lord Carr, has said, that the Government will take very careful note of this report and that they will get some action going as a result of it.
§ 6.32 p.m.
§ Lord HALE
My Lords, I am happy to associate myself with many of the things that have been said and, in particular, with the words of the noble Lord, Lord Carr, who said that this is something that your Lordships' House can do extremely well using its wealth of expertise. I consider it almost an impertinence on my part to intervene among so many experts; but I feel that, on the whole, individual opinion may be heard. It was about three years ago when I requested the assistance of the research department of the House of Commons who gave it in such measure that I had a mass of documents setting out the details of the time. It is interesting to recall, in the light of some of the remarks made, that there is not much that I disagree with at all. I do not think there is anything I positively disagree with, but in parenthesis I can say that I realise it is part of the Socialist myth to say that an enormous amount of gambling goes on in the price of commodities and it is part of the Conservative myth that nothing of this kind really happens. While much has been missed out on this subject in the report, their finding is that, in general, long-term buying by persons who have some interest is more of a stabilising factor and the danger comes from short-term buying for 944 bigger profits which takes place more rarely and in times of expansion.
Three years ago, the problem was grain prices; that little fish had left the shores of Peru and that that, mysteriously, had put up enormously the price of the soya bean in America; and that cattle feed was expensive. Four slightly sinister-looking commercial magnates had arrived from Moscow and, by a simultaneous operation, had purchased practically all the wheat that America had left from a very successful year's crop. But the organisation did not go quite so well on shipping. The headlines were about approaching famine, about the world being confronted with this disaster and that disaster. There were admirable articles with sensational headlines, and the problem of prices was one of considerable magnitude.
I read those headlines with pleasure and I propose to devote myself for a minute or two to what has happened in the last two days—the two days since this report was published. I am sorry to say, pessimistically, that while I am not criticising the admirable work of this Committee—and it would be a gross impertinence to do so; for it has been admirably done and presented, and I think it is a work of reference that will be consulted in the future—I feel that the prospects of its recommended solution, with which I agree, being put into effective action within any reasonable time is a little remote.
I rely solely upon The Times for my information. At this moment in another place they are involved in a painful discussion on the after-effects of cases of corruption with which Members are said to have had connection. I do not comment on that. Corruption has always been with us. It is a matter that has had its spot in the history of commodity prices. I think it was Rudyard Kipling who said:Who shall say that the secret hidUnder Cheops' pyramidWas that the contractor didCheops out of several millions;Or that Joseph's sudden riseTo Comptroller of suppliesWas a fraud of monstrous sizeUpon King Pharoah's swart civilians?The subject of commodity prices, historically speaking over the years, is one of infinite romance; and this report contains many paragraphs of very great 945 interest: the burgeoning of the cocoa tree and its three- and six-year period in addition to its four and eight, if I remember. The noble Lord, Lord Thomas, who spoke just now, made another stimulating suggestion that buffer stocks of subterranean metals, elements, were buffer stocks while they were under the ground. And they should be able to be called upon urgently for increased development at short notice to deal with an emergency; that could be done much more cheaply than by endeavouring to superimpose superstructures of metals above the ground.
The report deals at length with the subject of coffee. What has happened since? What has happened to coffee is that the price which soared rapidly to about £4,000 a ton has now sunk with equal rapidity to a forward price of about £1,750 per ton—an enormous variation, largely based on the fact that Brazil is an immense producer and on the statement that Brazil had suffered terrible frosts which destroyed the crops and provided one of those unforeseen or, if not wholly unexpected, at least impossible-to-avoid emergencies which can have catastrophic effects.
On the other hand, it was stated in the news last night that a number of exporting firms in Berlin are facing insolvency because they were buying forward on a fallen market, and it has been alleged—though not too specifically—that there is some evidence that the degree of frost involved was grossly exaggerated. Certainly I read that trees had been destroyed all over the place. That does not quite conform with the fact that it is reported they are anticipating a very good coffee crop this year. Perhaps it might bear some investigation.
In the same way, one great expert apart from Miss Ady—she was a great expert and was followed by another great expert who spent his life dealing with, cocoa and here I disagree with the noble Lord, Lord Roberthall—concluded the evidence by saying that he could tell us some more very interesting stories about cocoa, and the noble Lord, Lord Roberthall, thought the moment had come when the Committee should not be occupied with interesting observations but must get its nose to the grindstone of pure and undiluted fact. I regret the loss 946 of that information, but some of it is to be found in a book published under the pseudonym of Adam Smith, which we are told conceals the name of a well-known and rather jolly character in his writing, who told us the story of a Swiss bank.
It is a very odd Swiss bank because it is mostly American; it was sited in Basle, which is not the best place to operate in Swiss financial circles. It was full of brilliant young men with ideas, and the writer acquired shares in it and followed its career for a time, by which time it has been taken over by a Californian bank—a bank of great magnitude with immense assets—which was lucky for the Swiss bank and unlucky for the Californian one, because something was then disclosed about one of the directors of the Swiss bank, known for its struct rectitude and its habit of secrecy, which undoubtedly assists gentlemen, who are not always observing the laws, to conceal their funds. If I may interrupt myself, I think I have said before that it was Voltaire who said:If you see a Swiss banker jumping through a plate-glass window, jump after him immediately without hesitation; there is at least 10 per cent. in it".It was found that one of their enterprising directors had signed contracts to buy half the cocoa supply of the world. If I remember correctly, it finished with a trial of the principal accused in absentia; and Private Eye, who can see fairly clearly in a fog just like Sherlock Holmes could, have recorded that they detected him as an economic adviser on television the other night. These things do happen. Let us say that the reputation of the City of London is very high, but we have to face these things.
What are the other problems? The report deals with tin. I said on a previous occasion that I once owned a tin mine which I had to buy for £1,000. It was operating with profit until the price of tin dropped to £30 per ton. I have long since parted with it at the price I paid for it, and I know nothing about its present condition. But, in the course of the evidence before the Committee, it was said that the primary producers, where they could do an OPEC, would do an OPEC if we did not watch it. Primary producers will say: "This is our price for tin: you can take it or leave it." That is exactly what is reported in The Times this morning 947 as being the present intention of Bolivia, the second largest producer of tin in the world. These are quite serious matters and they all make a little more difficult the concentration on their hopes of a scheme which, as I see it, could be done only through UNCTAD and on which UNCTAD has done a great deal of research. The Times also reported yesterday that UNCTAD has again adjourned until the spring the consideration of the fund for financing variations in the price of commodities.
I have mentioned coffee and tin, and I would, with the utmost delicacy, mention something which is sub judice—or morally sub judice anyway—on which I do not propose to make any comment, because the case will go to the Lords. We have a contest going on over an international cartel in the battle between an American company and Rio Tinto Zinc. It is a cartel in uranium, which is not classified among the normal commodities; but uranium is a raw material—not only metaphorically but literally—with a very dangerous potential. There was the fact of the cartel and the fact that a ship sailed loaded with uranium from Zaire a few years ago, landed in Holland, changed its name, its register and its flag, and went out to sea, got loaded up with uranium at sea and voyaged along the Mediterranean where it finally arrived somewhere near Israel. The Israelis say they never noticed it, and so far as they know nothing like that has ever arrived there and no other destination was an alternative.
The question of the observance of international obligations is today a very grave matter indeed. I see that some of my intimate friends and colleagues in another place are talking about producing a paper—which I have not yet read, so I shall not comment on it—suggesting that we break all our obligations to our Common Market partners at will. I think that our Common Market partners have put up with an awful deal from us. If we break, or attempt to break, or attempt to obstruct the working of a solemn obligation reinforced by a plebiscite and reinforced by long decisions in both Houses, who is going to trust Britain's word again? Who is going to trust anybody's word again? What is the use 948 of entering into the kind of obligation which Helsinki represents? As was explained to me by my mentor, Dick Stokes, an international commercial treaty is an obligation which is observed by both parties, so long as it is to their mutual interest, or to their separate interest, and no more.
Those are some of the things that are worrying me, and I apologise for taking a longer time on them than some much more distinguished speakers. I should like to thank the noble Lord, Lord Carr, for the privilege of having heard his speech and, as I am not so quick on the uptake as I once thought I was, I shall study the report of it and read it with the rest of the debate.
Unfortunately, I have been distracted by a silly paragraph in the Daily Telegraph, which I ought to have had more sense than to take the slightest note of. But my attention was attracted to it, and I am supposed to have said something at a small party yesterday at which I was present, and at which a young man who said he was from the Daily Telegraph exchanged some words with me. He asked my name, he asked what I did and he asked whether I knew Lord Brockway, and I answered him in monosyllables. I did not say what was attributed to me. I hope it may have emanated from some mistake. I am quite incapable of saying that, and a lot of people know it. I thought that I would not be such a fool as to trouble your Lordships with such an allegation but, at my age, it has worried me. This is the kind of small, annoying suggestion to which I have never been exposed before.
The last time I spoke to the Daily Telegraph was when that great doyen of reporters, Harry Boyne, later Sir Harry Boyne, invited me to have lunch with him in the Press Gallery. When he was knighted I asked him to come and visit me here. I am sorry that he has not done so up till now, and I hope that he very soon will. I do not wish the young man any harm at all, because he seemed to be a very nice man, and I shall leave it there. I am grateful for your Lordships' patience, and I apologise for having taken a little longer than I anticipated, which was due to a slight inability to concentrate. I congratulate all who have worked on this 949 report, for producing a very fine report indeed.
§ 6.53 p.m.
§ Lord ENERGLYN
My Lords, there would have been a very serious gap in the deliberations of your Lordships' House if the noble Lord, Lord Roberthall, had not brought this amazing—nay, I would say fabulous—report before us today. In saying that, I earnestly hope that the report and its evidence will not suffer the same fate as its counterpart suffered in the United States in the 'fifties. I refer, of course, to the report popularly known as the Paley Report. If the Americans had heeded the conclusions of the Paley Commission, who knows?—world economics might not have been in its present state of confusion. Therefore, it is to the hidden messages embodied in this remarkable report that I should like to draw your Lordships' attention.
The Paley Commission produced a monumental survey of the resources of the world under the prophetic title "Resources for Freedom". In presenting the report to the Speaker of the House of Representatives on 1st July 1952, President Truman expressed thehope that this report and the actions which may be taken as a result of it will contribute significantly to the improvement of this Nation's material position and to the strengthening of the free world's economic security, both of which are the continuing objectives of United States policy".This declaration was important as we students of the subject well know. But it revealed how aware President Truman was of the perilous state into which America could be plunged, unless there was some orderly approach to the problem of the world's material resources. It is perhaps quite a good thing for Britain that America forgot its Paley Report, because I see that this omission could work to our advantage.
The Commission made the following suggestion, upon which the economic strength of America could be founded:The industrial nations of Western Europe and Japan, on the one hand, have strong industrial capacity and labor skills but severe resource limitations. They can prosper in the future only on the basis of heavy imports. At the other extreme are numerous nations of South America, Africa, South Asia, and the Middle East, whose average living standards are low but who possess rich and relatively undeveloped natural resources often in excess of their prospective needs".950 It went on:In between these two groups are such nations as the United States, Canada, Australia and New Zealand whose resources are relatively strong, whose industry is advanced and whose living standards are high. These three groups of nations could co-operate economically over the next 25 years to the tremendous advantage of each".It did not come about. If this geo-economic bloc had been achieved, Britain would have been forced to enter the EEC, and would have had no option but to do so. Its failure to materialise was equalled by Britain's failure to understand the profound nature of this American concept, this bloc. If we had been mindful of the material and ethical resources of Australia, Canada, New Zealand and—I even go so far as to say—South Africa, we should not now be making the admission in paragraph 1.12 of this report referred to by the noble Lord, Lord Davies of Leek. As he pointed out, given the chance to operate with our expertise we could, as entrepreneurial mineralogists, once again be supreme in the world of the mineral markets. Forget not, my Lords, that when we had an Empire we governed over 30 per cent. of the known mineral resources of this world. We never had to bend once to ask for any commodity from anyone; it was there for the asking. Therefore, I read certain messages into this report which makes constant reference to stockpiling.
Certain noble Lords have referred to stockpiles as buffer stocks. Should stockpiles be created to buffer fluctuating prices, or should they be created for stragetic purposes? The world in which we now live completely outmodes, in my opinion, the use of the terms "buffer stocks" and "strategic resources". We are now concerned about the possession and the acquisition of key materials, because without them the industries concerned will be brought to a halt. Therefore, we must look at our position in relation to the EEC.
Britain appears to me to be in a far less vulnerable position than any other country in the Community. We are the only part of the Community that has an unfulfilled mineral potential. If I may digress for a moment, it is an undeniable fact of history, is it not, that war is the easiest of human enterprises? Ironically, war eradicates temporarily the wide 951 spectrum of economic problems. Emotional wars are relatively unimportant, but premeditated war demands long-term planning and the development of stockpiles. It would be too sinister, therefore, to attach undue importance to the development of the buffer stocks we are speaking about if they are intended for premeditated war, but perhaps it is not too unrealistic to consider that possibility. Therefore we should look at Britain's resources.
There has been a surge of mineral exploration in Scotland and a number of very important deposits have been discovered. None of these deposits is, however, worth the paper upon which it is written because its development will be denied by one planning authority or another. If we wished, we could develop small mines in this country which would provide long continued, healthy and highly expert occupations for miners. This in itself would be worth while. For too long these deposits have been considered to be small and not commercially viable because they have had to compete in world markets. However, when one speaks about commodities that are in a strategic position, price is not the primary factor; it is the ability to possess them which matters.
One could think, as a cachet, of the romantic possibility of developing the goldfield of Sutherland. In 1868 there was a gold rush into Kildonan. It was reported that 400 freelance prospectors extracted in two years £12,000 worth of alluvial gold panned from the streams. This goldfield exists but it has never been accurately located. Nevertheless, a goldfield is waiting for us there. There is also the gold of Wales, but one could not touch it without meeting opposition from the planners. Perhaps, though, gold is not so important.
The noble Lord, Lord Davies of Leek, pointed out that one can enter fields where one may do more harm than good. In this context, may I remind noble Lords of diamonds. America, realising its dependence upon very restricted parts of the world for industrial diamonds, has developed synthetic diamonds on a massive scale. In 1964 its output of synthetic diamonds was 4 million carats; in 1968, it had risen to 11 million carats. This represents about 50 per cent. of the 952 diamond requirements of America. Without these industrial diamonds, American industry could not proceed. What about Britain? Should we go in for the production of synthetic diamonds? The technique is known and there is no limitation upon the supply of carbon. After all, the diamond is only crystalline carbon. However, as the noble Lord, Lord Davies of Leek, has pointed out, it would not be to our advantage, with the Diamond Corporation located in this country, to go in for the production of synthetic diamonds.
Let me take another good case. So far as the present situation regarding cobalt is concerned, we are one of the biggest consumers of cobalt in Europe. The total world output of cobalt is about 24,000 tons, 14,000 of which come from Zaire while about 4,000 tons come from across the border in Uganda. Therefore, 18,000 tons of cobalt come from that very critical area of Central Africa, and whoever annexes the output of cobalt from those two countries has the world demand for cobalt at his mercy.
I could go on at great length in this way. If only we could curb the unbridled powers of planning authorities, who stifle at birth the discovery of minerals in this country! With great and absolute confidence I should like to declare that within five years I could find work for at least 10,000 miners whose turnover, in terms of saving imports, would be of the order of about £100 million. Therefore I look upon this fabulous report, upon which again I congratulate the Committee, as containing the kind of evidence which we, who are unashamedly entrepreneur mineralogists, can use to persuade Governments to develop their resources intelligently, without spoiling the scenery and for the benefit of mankind.
§ 7.9 p.m.
§ Lord LEE of NEWTON
My Lords, may I join with other members of the Committee in paying a very sincere tribute to our chairman, Lord Roberthall, for the enormous skill—indeed, patience at times—with which he guided us through our long deliberations. Perhaps the best compliment we can pay to him is that on the one occasion that he could not attend a meeting we decided not to hold it rather than put anybody else in the chair. One 953 cannot pay anybody a much higher compliment than that. Also we had the great advantage of the services of Professor MacBean, who acted as our adviser. He has long experience and knowledge of this subject and he was invaluable—as was our very able Clerk, Mr. Carstairs, who went to enormous pains to keep us informed of every development in commodity prices as it took place. One cannot thank him too much for the work he did on our behalf.
Your Lordships may well consider that members of a Committee which used about 630 pages to produce a report, have said quite enough without them now wanting to take part in a debate of this type. I am sorry the noble Lord, Lord Carr of Hadley, has not yet got round to reading Volumes II and III; I assure him that they are splendid reading. Now that we have three months' recess, he could, with great advantage, peruse—in the small hours of the morning if necessary—the words of wisdom which we offer to the world in Volumes II and III.
It has been said that the "heavy" Press, as I believe they like to call themselves, have not greeted this Report with the minute, detailed examination that it deserves. Indeed, I thought that the report in the Guardian was rather silly. As I think my noble friend Lord Roberthall reminded us, the Guardian said that we were opposed to the creation of a Common Fund. How anybody who has read Paragraph 9 and the conclusion to Paragraph 31 could come to a view of that sort I just do not understand. I was extremely pleased when my noble friend Lord Roberthall corrected the Guardian in a letter which was most apposite and appropriate to what they had said.
I do not want to rehearse all the things which other noble Lords have said during this debate, but I should like to say with hindsight that perhaps we should have stressed more than we have, either in the report or in the conclusions, a reference to the retained value of some exports from the developing countries. Had we been able to obtain more evidence from representatives of the LDCs which export considerable portions of their raw materials it would probably have helped in this respect but, despite our efforts to get more people of that type to give I evidence we just did not manage it. 954 We had the advantage of having Sir Guy Sauzier from Mauritius, a country about 90 per cent. of whose exports consist of sugar alone. One can well imagine their problems, but we did not receive that kind of reaction to the advances we made to some of the LDCs for people to come along and give evidence to us.
In Appendix V of Volume III, at Page 615, we have the submission from the Institute of Development Studies, and I attached particular importance to their submission. The submission itself shows that, in some cases, the retained value of exports of some of the LDCs is as small as 10 or 11 per cent., yet, where they make efforts to add value by indulging in processing operations, the obstacles in the form of tariffs rise speedily with the degree of processing, and, as tariffs are expressed as a percentage of total value, they represent a much higher discriminatory tax on added value due to processing, than the nominal tariff rates would suggest.
This is a deleterious approach by the consuming countries. I believe that, if we are to see the countries of the developing world get more and more advantage from their own assets, we must not only welcome but also assist them in doing far more processing work on their products, instead of raising the tariff walls against them as would appear to be the case. I submit to noble Lords that, if they care to examine the submission I have mentioned, they will see that, whereas we all want to see a bringing together of the producing countries and the consuming countries, while discrimination of this type exists we cannot very well expect that the late developing countries will be very happy about their relationship with us.
I should like now to turn to matters which are discussed in Chapter 5 of Volume I, namely of our future supplies of minerals, metals, et cetera. One has no need to have been associated with the Colonial Office, as I was, to know that a new dispensation now obtains. A great many of the developing countries are now independent. They have their own governments. I am pleased that they have decided to take over ownership and control of their raw materials. I believe this was an absolutely essential step, but in Paragraph 5.9 of Chapter V we refer to the changes which have now come about. We point out that, whereas a few years 955 ago the great companies in the developed world invested their capital in searching for metals and then in sinking capital in the mines and so on, they are now holding back and they are doing so because there is a feeling of uncertainty. Apparently, in some instances, Governments in the developing world have changed the terms under which that capital was sunk and there is now apprehension because of the political uncertainties created by changes in the terms under which it was agreed that such capital should be sunk. As we know that the manufacturing world is looking to its own expansion—in other words the ability to gobble up more and more raw materials—if there is to be a hiatus in our supply position from many of these developing countries, an extremely serious position could emerge.
Perhaps I may mention copper. We had evidence from a number of sources—among which I remember Sir Mark Turner—that, although copper is now in surplus, it will be in very short supply indeed by the 1980s. One questioned a whole range of witnesses as to whether there was any machinery by which the problem which has now arisen could be circumvented, and, frankly, there is no such machinery in existence. Therefore, the Committee took the view, as those of your Lordships who have read Chapter V will know, that the time had arrived when we should try to involve Governments in making arrangements in order that the developing countries shall get the best out of the exploitation of their own indigenous raw materials and the consuming world he assured of a continuous supply. As somebody said, there is mutuality in this, but, we must get some arrangement at Government level which can guarantee that contracts will not be violated and that capital can be sunk. When we talk about metals and minerals, we are talking of a very long time lag indeed before there can be any recoupment from the investment of capital. A matter of years is involved and I believe that this is a most vital consideration and one that the consuming world will neglect at its peril.
At UNCTAD IV in Nairobi Dr. Kissinger made a very interesting suggestion. He suggested that there should be an international resources bank set up 956 in order to guarantee finances for this kind of development. I do not think it was taken as seriously as it ought to have been at that stage. We inquired as to whether there was any possibility of the idea being resurrected, but our inquiries were rather negative. I do hope that when UNCTAD again look at this problem they will either look at the suggestion which Dr. Kissinger made, or will look at the way we have tried to phrase our recommendation on this subject, because, as I repeat, there is here a mutual advantage to both supplying countries and those who are consuming.
The question of indexation, and so on has been raised. I do not think that it would work. On the other hand, we have to look at the problems which the present period has thrown up. If we take Zambia, 90 per cent. of their export is, of course, copper. While Kenneth Kaunda has seen the price of copper go almost through the floor, there have been huge increases in the prices of his imports. When you have a developing country, far from being affluent, which is faced with a problem of that type, how can it possibly find capital to invest in more copper mines, anyway? Therefore, we really must attempt to get an answer to what I hope all noble Lords will agree is a very vital issue indeed.
The report itself has received a very generous and very constructive reaction in your Lordships' House. I think the major criticism has been by my noble friends Lord Walston and Lord Kaldor on the question of our reaction to the commodity markets. I see their point, but those of us who are not as enamoured as others of the market mechanism were satisfied that, if we were to get the opportunity of speedy action on what we were suggesting, our best approach at that time was to mention the weaknesses we found in the market mechanism—and indeed we mentioned those in some detail—rather than to embark upon a venture, which most certainly would have meant that the Committee would sit for the next five years, of hoping to convince other members of that Committee that the best approach was to abolish the commodity markets. Indeed, when my noble friend Lord Kaldor refers to what Mr. Carter and others have said in the States, I do not think even my noble friend would say 957 that the commodity markets of the United States are in the slightest danger of being abolished by Mr. Carter.
§ Lord KALDOR
My Lords, with my noble friend's permission, I said that President Carter believes that stabilising commodity prices by means of buffer stocks is very much in the interests of the United States as a consuming country, in order to ensure supplies and to moderate inflation. But to introduce buffer stocks as any kind of price stabilisation device is not the same thing as abolishing the commodity markets.
§ Lord LEE of NEWTON
My Lords, I am making the point that in our interpretation of our terms of reference we did not believe that the problems of world inflation figured among them. We were more parochial perhaps in our approach to our terms of reference on that. We did, as my noble friend knows, level some criticism particularly at the London Metal Market. I do not want to repeat what my noble friend Lord Roberthall said, but I thought our criticism was pointed, and during the course of this debate knowledgeable people have said that this is essential if we are not to see an increase of the use of the commodity markets as a hedge against inflation.
My Lords, I do not wish to go any further. It was a great experience to be able to analyse the problems which this subject brings on a world scale. People have said that they hope our Government will take notice of our report. Quite frankly, I hope so, too. But I hope that a large number of Governments throughout the world who are equally nonplussed as to how to get stability into commodity prices will take note, too. I believe that, unless UNCTAD itself can get far more specific, instead of merely believing that all you have to do is mouth something about a common fund without analysing precisely what you mean, we are not going to make rapid progress. Therefore, I believe that our report will stand up to investigation on a world scale. I hope that, if others will emulate that which I have asked the noble Lord, Lord Carr, to do and read Volumes II and III as well as Volume I, it will have a very advantageous effect indeed.
§ 7.27 p.m.
My Lords, during the course of this excellent debate there have been a great number of very well deserved tributes paid to the noble Lord, Lord Roberthall, and his colleagues for the very great work and the excellence of the work they have done in producing this report. As the noble Lord, Lord Carr of Hadley, invited me to do, on behalf of the Government I very warmly join him in saying that this report is a thorough, balanced and very helpful contribution to the debate on this vastly important subject. Indeed, taken as a whole, I believe that it provides one of the best and most comprehensive introductions now available to current problems of commodity trade and of commodity prices stability. I wonder if I can say it perhaps in more personal terms, in that over the last 20 years or so I have, in a very amateurish way, tried to dabble in this subject, and I have found it, as the noble Viscount, Lord Simon, said, a maze. Often I have wondered where to begin. If I were beginning now I would know. I would begin with Lord Roberthall's report, and no one could do better.
My noble friend Lord Lee referred to Volumes II and III, and I also should like to do so. It is not just the analysis and the recommendations which are contained in Volume I which are so valuable. I think the other two volumes and the bringing together, as the Committee did, of that remarkable list of experts from various fields connected with this overall problem is really a remarkable piece of work. I recognised in the list of witnesses a considerable number who over the years, have in one capacity or another sought to guide my own halting steps through this maze, not least the witness to whom the Committee and a number of speakers in today's debate have made special acknowlegement: I refer to Mr. St. Clare Grondona, whose work in this field has, of course, been outstanding. Without wishing in any way to pronounce from this Box on his scheme, I believe that he will welcome the fact that my noble friend Lord Walston and the noble Viscount, Lord Amory, pointed to the significance of the passive, automatic character of his proposals in relation to long-term trends. I believe that as regards the Grondona proposals that is an important aspect to bear in mind.
959 I now turn to the general nature of the problem. I think that I cannot do better than to summarise what I see as the Committee's own broad conclusion, with which I hope all noble Lords can agree. The market prices of commodities perform a necessary function in the world economy, but excessive price fluctuations are damaging both to producers and to consumers. So importing countries like Britain have a common interest with exporting countries in securing greater price stability. That, I suggest, was the Government's central theme in the commodity initiative which we took two years ago at the Commonwealth Heads of Government meeting at Kingston, and it remains the foundation of our whole approach.
How should the problem be tackled? I share the Committee's view that, because the circumstances of individual products vary so widely,only the commodity-by-commodity approach stands any chance of success".It follows that schemes to stabilise prices, where action is practicable and economic, must be based on individual commodity agreements negotiated between the main producers and consumers concerned. At Kingston we sought to give a fresh impetus to international work on precisely those lines. The Committee express concern that some of the impetus may subsequently have been lost. If I may, I should like to resist that suggestion. Indeed, on the contrary; our proposals were substantially carried over into the position adopted by the developed countries collectively at the fourth UNCTAD Conference in May last year; and have, we believe, been given practical effect in the programme of work on 18 commodities which that conference set in hand.
It is too early to say what kind of international action may prove appropriate for those 18 products. Commodity agreements already exist for tin, cocoa and coffee. Of the other products, it is clear that not all are likely to be suitable candidates for price stabilisation schemes. In some cases such schemes may not be feasible for technical reasons; in others they may not be relevant to the real problems of the commodities concerned. There is no universal solution and it would be unwise to place too much emphasis on any one technique.
960 Because direct action on prices is not always possible, action to stabilise the export earnings of developing countries is an essential element in our approach. I noticed that the noble Viscount, Lord Simon, put emphasis on the distinction between the stabilisation of earnings as against the stabilisation of prices, and the Committee also emphasised this distinction. In this connection, we should all recall that the European Community broke new ground in this area with the Stabex scheme, to which my noble friend Lord Davies of Leek and my noble friend Lord Walston referred. The Stabex scheme was introduced under the Lome Convention in 1975. Then in 1976 substantial improvements were made in the International Monetary Fund compensatory finance facility, which is specifically designed to deal with earnings instability on a worldwide basis. The IMF scheme is now, we believe, an effective international response to that problem. Following the increase due this year in IMF quotas, up to 5.6 billion dollars will be available under the scheme to non-oil developing countries and a further increase in quotas is currently under consideration.
I now turn to the specific recommendations which the Select Committee has made. Clearly, I cannot discuss all of them today in much detail but there are one or two upon which I should like to comment. One was spoken about by the noble Lord, Lord Carr of Hadley. He referred to the importance of information about the behaviour of commodity prices. I entirely agree with the noble Lord, and of course with the Committee, that full and up-to-date information on trends in the production and consumption of commodities is clearly essential. We agree with the Committee on the importance of the present international efforts in this connection, and we are alert for ways in which they might usefully be extended, with particular reference to information on long-term trends of supply and demand, to which the Committee drew particular attention.
Secondly, I should like to comment on the point raised by my noble friend Lord Lee of Newton who referred to the Nairobi Conference and the proposal which Dr. Kissinger introduced there. I understand that the new United States Administration has indicated that it does not 961 intend to pursue Dr. Kissinger's specific proposal for the creation of an international resources bank, but it does believe—and Her Majesty's Government agree in this respect—that further international work is needed on the investment problem to which Dr. Kissinger drew attention. I have no doubt that the two Governments will seek to examine that area of problems to which my noble friend referred.
Next, I should like to refer to the size and financing of commodity buffer stocks. Where buffer stocking is feasible and economic—and, as the Committee point out, it is not appropriate in many cases—I agree that the aim should be to prevent excessive reliance on export or production controls. But the actual size of the stock in any particular case will depend on a variety of factors, including the price stabilisation objectives of the commodity agreement concerned. There is no general rule to determine the right size or to tell us exactly where to strike a balance between buffer stocking and other stabilisation techniques.
The Committee urge the Government to press for equal contributions from consuming and producing countries to the financing of commodity stabilisation schemes. Noble Lords will recall that the noble Lord, Lord Carr of Hadley, made reference to that matter. Once the decision to create a new buffer stock has been taken, producers and consumers of the product concerned have to choose between alternative methods of financing, on the merits of the case—and there are a number of possibilities including the use of levies. For that reason, we believe that it would not make sense to proclaim in advance a general commitment to any particular approach. But our starting point—like that of all the main consuming countries—is that, where producers and consumers have agreed on measures to stabilise the price of a commodity, lack of finance must not prevent an international agreement from being concluded, and the parties to the negotiation should discuss ways of ensuring that.
The noble Lord, Lord Roberthall, made a brief reference to the proposals of his Committee relating to price indexation. I agree with him that commodity price indexation—that is, attempts to link commodity prices to movements in the prices of manufactured goods—would 962 be impracticable and inevitable and, more generally, that price enhancement is not a rational means of transferring resources—in other words, of giving aid—to developing countries. Quite apart from the huge practical objections, the distribution of benefits and of costs would be arbitrary and indefensible.
There have naturally been several references to the Common Fund and I welcome the Committee's endorsement of the approach which we adopted, though I gather from what the noble Lord, Lord Roberthall, said, that it was a near thing and that we only just escaped censure. But it is a good thing that, under the various influences in the debate within the Committee and elsewhere, misunderstandings which at one time existed have to some extent been cleared away.
§ Lord LEE of NEWTON
My Lords, can my noble friend give me an assurance that what we were going to say on this subject was not leaked, as a result of which the Government immediately jumped into line?
My Lords, it certainly did not reach this part of the Government. I have paid tribute to the influence of the Committee, but I do not want my noble friend to over-emphasise that.
As I have said, I welcome the Committee's endorsement of the approach which we, with the other main developed countries, adopted at the United Nations conference on the Common Fund in March this year. I think that we can fairly claim to have made a major contribution to this collective position. Since March, there has been a further important development. At the recent Conference on International Economic Co-operation, all the main industrialised countries joined the European Community in agreeing that a Common Fund should be established. Its specific objectives and purposes remain to be worked out in resumed negotiations in UNCTAD in the autumn.
I believe that, in the eyes of many countries, the original proposals for a six billion dollar Common Fund, which were put forward by the UNCTAD Secretariat, have now been largely overtaken. These proposals present real difficulties and the priority task now is to work out the elements of an alternative 963 approach based on individual commodity agreements. Useful economies should be possible if the financial resources of the agreements can be brought together. I believe that that point was emphasised by the noble Lord, Lord Seebohm. The essential role of the Fund, as we see it, should be to take advantage of those economies.
However, a great deal of work remains to be done before a practicable scheme can be devised. We welcome the decision of the Commonwealth Heads of Government at their recent meeting in London to set up a group of technical experts from Commonwealth countries to examine all the issues. I am sure that noble Lords will join me in congratulating my noble friend Lord Campbell of Eskan, who will chair the group, which held its first meeting in London at the end of last week.
In addition to that kind of work we are playing an active part in work which has started among the developed countries to prepare for the resumed negotiations on the Fund in November. We look forward to those negotiations. I hope that the participants in that conference will get down to the positive task of designing a Common Fund which will be both viable and effective.
As I have said, the report is an extremely valuable one, but I should like to endorse the remark made by the noble Lord, Lord Seebohm, that it should be our hope that these three volumes will not simply find an honoured place on library shelves. I am sure that they will, rightly, have an honoured place on library shelves; they will be an enormously valuable source of material to students. But we should seek to ensure that they are put to practical use. I have already indicated the Government's attitude to a number of the recommendations which your Lordships' Committee brought forward. Further than that, I can assure noble Lords that, in working out the approach to the forthcoming negotiations to which I have referred, the work of the Committee and its report will be a most practical aid to the Government in the formulation of their policies.
§ 7.46 p.m.
§ Lord ROBERTHALL
My Lords, we have had a very good debate. It has been 964 wide-ranging and much of what has been said has been relevant to our discussions. In fact, it has been a better debate than some from that point of view. At this late hour it would be out of place for me to attempt to discuss individual speeches. However, I should like to mention two. First, I refer to the welcoming speech made by the noble Lord, Lord Carr of Hadley, who, at least from my point of view, gave the debate a good wind. Secondly, I refer to the speech of the noble Lord, Lord Oram, who made very generous references to the general scope of the report. I expected him to be even more cautious than he was in his dealing with the recommendations that we made. For what was a relief, if perhaps rather a small one, I thank him.
I should also like to thank the House for giving me the opportunity of being Chairman of the Committee, which I found extremely interesting and enjoyed very much. May I now beg the leave of the House to withdraw the Motion.
§ Motion for Papers, by leave, withdrawn.