A chronological narrative 521 The 1960s and the 1970s

As discussed in Section 3, the 1960s were years of high growth (in both developed and developing countries), moderate inflation, low (and even negative) real interest rates, accelerated expansion of trade, and high real prices of commodities (see Table 3). The economic buoyancy of those years was based on expansionary Keynesian macro-economic policies in industrialized and developing countries. Stable exchange rates among main industrialized countries under the Bretton Woods system, coupled with the liberalization and increase of world trade as a result of the success of the sequence of GATT rounds of trade negotiations, also supported world growth. LAC, Africa, and the Middle East were the fastest-growing regions in the 1960s, and they continued to grow strongly during the 1970s, although East Asia began to overtake all developing regions in that decade. Rents from natural resources (including agriculture) financed, in various degrees, the development of the industrial sector and the expansion of the welfare state in many developing countries.

Synchronized and high growth across a variety of industrialized and developing economies sustained global demand for commodities. Within this supportive economic environment, agriculture showed strong growth rates in the three developing regions of Asia, Africa, and LAC during the 1960s.

In the early 1970s those expansionary policies led to accelerating inflation. The United States abandoned the Bretton Woods system of fixed exchange rates in the first half of the 1970s, and nominal and real exchange rates in major countries turned volatile. In particular, the U.S. dollar underwent a cycle of depreciation in the 1970s. A depreciating dollar also contributed to higher commodity prices (see Section 3).

Besides high growth, a depreciating dollar, and expanding inflationary pressures, the jump in agricultural prices was also related to poor weather conditions in many parts of the world (a cyclone in Bangladesh, 1970; a long drought in sub-Saharan Africa; partial failure of the Soviet cereal crop in 1972; floods in India) and a hike in fertilizer prices, partly due to problems with Morocco's industry.

Agricultural prices jumped over 70% in 1973 (food, about 80%), but other commodity prices also increased significantly. In the case of oil, it happened in 1974 (the year after the sudden increase in agricultural prices), and it was also related to geopolitical developments in the Middle East and the Yom Kippur War.

In 1974 and 1975 the global economy suffered a significant slowdown, with many industrialized economies posting negative growth and close to 40% of the developing countries also in recession.

After the first oil crisis, developed countries tried to fight the slowdown with expansionary fiscal and monetary policies. The 1978 Bonn Summit reiterated the intention of industrialized countries to maintain global pro-growth policies. This approach only exacerbated inflationary pressures and eventually led to a more drastic monetary tightening in the 1980s. In the case of the developing countries, the notion of recycling petrodollars was promoted by the international community as part of the general effort to maintain world aggregate demand, which allowed many developing countries to borrow against ample export revenues supported by high commodity prices. All these policies contributed to world growth and inflation in the latter part of the 1970s and set the stage for the dramatic changes in the monetary policies of the industrialized countries and the developing counties' debt crises of the 1980s.

The story of the interaction of world macroeconomic conditions and agricultural production differs by developing regions during the 1970s. LAC, as mentioned before, had the best agricultural performance during the 1960s, and although declining, it also did well in the 1970s. High world prices fueled the expansion of exportable and import-substitution agricultural products while strong domestic demand sustained those products that (for policy reasons or due to intrinsic characteristics) were non-traded goods, and the expansion of the industry provided demand for agricultural raw materials. It is true that the whole economy grew faster than agriculture during this period, but this sector's growth was significant nonetheless and stood above growth rates achieved in subsequent years. It appears that even accepting the argument that the overall policy strategy was biased toward the industrial sector, supportive world markets and domestic income growth helped generate comparatively higher growth rates in the agricultural sector of LAC in that period. Of course, advances in agricultural technology, linked to the expansion of the Green Revolution and supported by the creation of national institutes of agricultural technology in the 1960s and 1970s in the region, and the expansion ofpublic and private infrastructure provided the material basis for that rapid growth.

In SSA, growth declined during the 1970s, mostly as a result of collapse in crops, while livestock production increased significantly. Overall, in SSA comparatively poorer production performance has been associated with macroeconomic imbalances, antitrade biases, war and civil conflict, lack of investment in agriculture, and high incidence of disease in rural areas. But the importance of these factors changed during various decades. For some African countries the emergence of mineral exports appreciated exchange rates during the 1970s, which had a Dutch-disease effect on agriculture and agroindustry. Also, Africa's economic growth and exports began to decline during the difficult transition from colonial rule to independence in the 1960s. The commodity boom facilitated increases in public and private indebtedness that, like LAC, ended up in the debt crisis of the 1980s in several countries.

Asia, however, continued growing, mostly determined by domestic conditions and internal economic growth during the 1960s and 1970s. In general, the density of the population and the mostly small-farm basis of production have made agriculture basically a domestic affair: Neither on the export nor the import side have the ratios of trade to domestic production gone beyond the 10-15% range. As in LAC and even probably to a larger extent advances in agricultural technology, irrigation, and infrastructure in general provided the material underpinnings for that fast growth.

5.2.2 The 1980s

After the second oil crisis at the end of the 1970s, inflation jumped to two digits in industrialized countries, and a series of elections brought new governments that changed the focus of policies from trying to sustain growth through Keynesian policies to fighting inflation using monetarist approaches. Nominal interest rates were raised substantially above inflation rates, leading to high real interest rates (10.6% and 4.1%, respectively, on average for the 1980s, with a peak of about 6-8% in real terms in the early 1980s; see Section 3). This policy change led to the global recession of the early 1980s, with world growth in 1982 being the lowest of the last five decades until the current downturn.

The deceleration of the world economy in the early 1980s did not cause an immediate decline in the prices of commodities because the United States acted as a demand buffer for agricultural products (due to the Farm Bill of 1980), and Saudi Arabia functioned as a supply buffer for oil. With the new U.S. Farm Bill of 1985 and the breakup of discipline in OPEC, plus the important changes in supply and demand discussed in Section 3.4, the result was a generalized decline of commodity prices in the mid-1980s.

The impact of these changes in world and domestic macroeconomic conditions on the agricultural sector differed by region. In LAC the accumulation of external debt during the period of high commodity prices led to the debt crisis of the 1980s. Devaluations of the exchange rates and the progressive advance of trade liberalization were supposed to remove the policy bias against agriculture that may have existed. Real exchange rates depreciated as many countries in the region favored export and import substitution agricultural productions. However, reductions in government expenditures in infrastructure and technology as well as the elimination of marketing and price support programs that were benefiting specific crop and livestock production in several countries tended to negatively affect supply. Furthermore, the higher cost of imported inputs (as a result of the devaluations) and the reduction of credit to agriculture by the public and private banking sectors (partially linked to structural-adjustment programs) had a negative impact on agricultural production. The slowdown in domestic demand affected livestock and dairy productions, which usually have an important component of domestic consumption; the crisis of the industrial sector carried over to some agricultural raw materials; and the weakness in world markets hit hard exportable agricultural goods and made it difficult for LAC governments (already fiscally constrained by the debt crisis) to continue the support of some import-substitution products, such as wheat in Brazil and Chile (Diaz-Bonilla, 1999). As a result of this combination of positive and negative circumstances, agriculture in LAC, although it continued to grow in the 1980s and performed better than the rest of the economy (particularly industry) during that harsh decade, the overall performance of the sector was worse than in the 1960s and the 1970s. The fact that during these earlier decades, when it was argued that agriculture suffered from a negative policy bias in incentives, agricultural growth was clearly higher than in the 1980s (when the bias was being removed) points to the importance of considering other income, demand, technological and cost factors when evaluating the performance of the sector.

In Africa, the impact of the debt crises was also felt in adjustments in exchange rate and fiscal policies. At the same time, competition from other regions, including the transformation of the European Union from a net agricultural importer during the 1960s and 1970s into a net exporter in the 1980s, affected agriculture in Africa.

The low prices of the 1980s also discouraged investments in the rural sector of many developing countries that came to depend on cheap and subsidized food from abroad and contributed to turning many of them, including a number of countries in sub-Saharan Africa, from net food exporters into net importers. Also during the 1980s there were disruptions related to the expansion of the Cold War to that continent. The East/West conflict appears to have hit Africa particularly hard, reinforcing and militarizing ethnic divisions.

In summary, both Africa and LAC suffered more than Asia from the change in world macroeconomic conditions in the 1980s after the second oil crisis. That crisis, along with changes in agricultural and trade policies in developed countries, led to the worldwide collapse in agricultural commodity prices during the second half of the 1980s. The heterogeneous performances were in part related to the different policy reactions, with Asia adjusting earlier and more efficiently to the economic shocks (Balassa, 1989). But the decline in world export shares by Africa and LAC also reflected the fact that these regions were more dependent on developed countries' markets for their exports than was Asia and that sectoral and trade agricultural policies in rich countries were changing during the 1980s in ways that undermined agricultural and agroindustrial production and exports from developing countries. The negative impact of industrialized countries' agricultural policies on the agricultural sector of developing countries has been amply documented (see, among others, Diao, Díaz-Bonilla, and Robinson, 2003).108

On the other hand, Asia, as already mentioned, followed a different path, mostly determined by domestic conditions. In addition, as being mostly a net importer of primary agricultural products, the decline in international prices of commodities during the 1980s might have even benefitted Asia. At the same time, capital flows to Asia were smaller in the 1970s than those entering Africa and LAC. The adjustment to changed global macroeconomic conditions (with very high real interest rates) did not affect Asia as much as LAC and several countries in Africa, which had also to absorb larger reversals in capital flows. Having avoided the crises of the 1980s, the good overall economic performance of the region generated growing internal markets that supported the expansion of primary agriculture and agroindustry.

5.2.3 The 1990s

After the early 1980s recession, the world moved to a lower rate of economic growth compared to the 1960s and 1970s—a shift that in part can be attributed to the economic consequences of the previous period of high growth and inflationary pressures in both developed and developing countries—and most commodities entered the decade of the 1980s with expanded supply capabilities created by both market forces and policy decisions reacting to high prices. The consequence was that real prices of commodities continued declining into the 1990s. In the case of agricultural products, industrial countries' programs of protection and subsidization continued while in many developing countries they were dismantled as part of stabilization and structural adjustment programs supported by the IMF and the World Bank.

From early 1994 to mid-1995, the U.S. monetary authorities initiated a period of tightening, increasing the federal funds rate about 300 basis points. The dollar, which had weakened in the previous years during the period of slow growth and low returns to assets, changed course and began to appreciate. Various middle-income countries that have currencies pegged to the dollar, particularly in LAC and Asia, began to lose external competitiveness. However, resorting to devaluation to restore competitiveness was not that simple, given the level of indebtedness in hard currency and the impact that such devaluation would have on the balance sheets of debtors and on the financial sector that had intermediated those hard-currency loans. The main difference from the crises of the 1980s (when international banks intermediated petrodollars, mainly to the public sector) was that in the 1990s an increasing component of external debt was held by the private sector. Devaluations were eventually forced by the reversal of capital flows to developing countries, and, as noted in Section 3, a second wave of debt crises erupted in developing countries, first in Mexico in 1995 and then in East Asia (1997), Russia (1998), Brazil (1999), and Argentina (2001).

In LAC trade and economic liberalization (including the accelerated pace of regional economic integration), the return of capital flows and the resumption of total domestic growth supported agricultural production. The latter was further helped by better international conditions once the world recovered from the mild recession at the beginning of the 1990s and agricultural trade wars between the EU and the United States declined in intensity.

In Africa, macroeconomic imbalances and antitrade policies began to be corrected during the 1990s in several countries, and agricultural growth recovered significantly.

In Asia, aggregate growth continued strong, even though the cycle of high inflow of capitals during the first part of the decade, followed by sharp reductions after the financial crises of 1997, appeared to have somewhat affected some of the East Asian countries. South Asia, on the other hand, experienced during the 1990s the best agricultural growth, along with the decade of the 1960s.

5.2.4 The 2000s

The sequence of financial crises in developing countries in the late 1990s and early 2000s eroded the demand side of many commodities, and devaluations in producing countries, such as Brazil and Argentina, expanded the supply of several of them. The unraveling of the technology boom in the United States and other industrialized countries and the events of September 11, 2001, led to the slowdown in the early 2000s in the U.S. and world economies. These supply and demand changes, combined with an appreciating dollar that reached its peak in the early 2000s, forced commodity prices, in general, to the lowest nominal levels in decades and to the absolute lowest real values for the whole history of data on them.

However, there were several developments at the global level that, incipiently since the mid-1990s and with full force once the early 2000s world slowdown was over, began to impart an increasingly expansionary tilt to macroeconomic policies worldwide. The millions of workers incorporated in the global economy due to the policy changes in China and the end of the Cold War put downward pressure on salaries and prices of manufactured goods, helping reduce inflationary trends. This, in turn, allowed central banks in industrialized countries to pursue more expansionary monetary policies. In the case of the United States, the easing of monetary conditions that started due to concerns about the impact of the change of the year 2000 on computer networks was reinforced after the "dot-com" collapse and the terrorist attacks of September 11. Until 2004 nominal rates were kept at very low levels not seen since the 1950s, and even then interest rates were held down for shorter periods.109 This strong (and, some have argued, exaggerated) monetary impulse eventually led to the economic acceleration that the United States and the world have experienced in the 2000s until recently, and it contributed to the subsequent sharp decline later in this decade.

That expansionary monetary policy was further reinforced by significant increases in private leverage (i.e., the amount of credit and debt built over a given level of incomes and capital). This increase in leverage was based on a lower perception of risk, fostered by (1) the relatively low volatility and high growth that the world had experienced since the mid-1990s, which some have dubbed the "Great Moderation" (see, among others, Bernanke, 2004), and (2) technological innovations in credit instruments that seemed to reduce risk (such as credit default swaps) or disperse it in a more manageable way (such as securitization and tranching of asset-backed instruments). A related development was the emergence, during the last decade, of a parallel banking and financial structure (which some have called the "shadow banking system") that has been borrowing short term and lending long term using securitized financial vehicles on both ends (Hamilton, 2007).

Monetary policies were also expansionary in developing countries. China maintained a semifixed exchange rate regime with the U.S. dollar, which generated current account surpluses and accumulation of reserves, expanding its own domestic money supply and accelerating growth. The Chinese reserves were invested in dollar-denominated instruments, mostly U.S. public bonds, contributing to the reduction of long-term interest rates. This arrangement was dubbed Bretton Woods II by some (see Dooley et al., 2003). Similar mechanisms operated in various Asian and Latin American countries that, to avoid the disruptions caused by the financial crises of the 1990s, accumulated reserves in their central banks, expanding their money supply, and invested those reserves outside their countries, in many cases in dollar-denominated assets, also putting downward pressure on global interest rates. Oil producers (and, to a lesser extent, other producers of commodities), benefiting from the increase in the prices of their products, also accumulated reserves, with similar internal and external monetary consequences. By keeping longer-term interest rates low, these capital flows contributed to the housing and stock market bubbles.

Developing and emerging countries became net exporters of capital, which, along with traditional surpluses from Japan, went mostly toward the United States, and the current account of this country that had briefly gone back into equilibrium during the recession of early 1990s started a sustained process of growing external deficits since the mid-1990s, until it reached the record of more than 6% of the U.S. GDP (Farrell et al., 2007). The continuous expansion of the U.S. trade deficit (reflected in the widening current account deficit) and low interest rates supported global growth. This, in turn, began to push up nominal and real prices of several commodities, particularly metals and energy. The devaluation of the U.S. dollar since the early 2000s also added pressure to the prices of commodities.

For agricultural goods, besides the resumption of world growth and greater demand from developing countries, higher nominal prices have been also influenced by competition with crops oriented to energy use (which, in addition, are subsidized in main industrial countries) and weather patterns (Von Braun, 2007).

The very accommodative U.S. monetary policy began to be reverted by mid-2004, putting in motion the events that led to the housing and related credit events of 2007 in several industrialized countries: The housing market peaked in early 2006 and started to decline sharply, whereas the stock market peaked in late 2007 and turned downward.

Clear signs of financial distress in mid-2007 led to a strong change in monetary policy by the Federal Reserve toward a more expansionary stance. The large price increases of commodities in the second half of 2007 and early 2008 appear to have been influenced by such monetary easing, which at that time led to fears of inflation and the decline in the U.S. dollar, prompting investors to turn to commodities as inflation hedges in a context where alternative investments in stocks and other assets did not show good returns (Frankel, 2006). This was combined with declining inventories in a series of commodities to generate the large price increases. Other factors such as world growth, supply conditions, or biofuel laws (although part of the structural reasons for strengthening prices), did not change in the second half of 2007 and first half of 2008 so as to explain the sudden increase. Changes in trade policies of several key countries also contributed to the run-up. Still, most real prices, as mentioned in Section 3, stayed below 1970s levels.

By mid-2008 financial stress was evolving into a full-blown financial crisis. As of this writing, a serious economic downturn is still unfolding.

All the changes in the world macroeconomic scenario during the current decade appeared to have contributed to a general slowdown of agricultural growth in developing countries during the first part of the 2000s, but this set the stage for the explosion in prices in the second half of 2007 and early 2008. Going forward, a strong world deceleration in 2009, extending possibly to 2010, appears unavoidable. Once the current recession is over the main question will revolve around the medium-term trend for commodity prices and agricultural growth in general and in developing countries in particular. This analysis requires characterizing both the current global recession and the potential paths out of it, topics that largely exceed the coverage of this chapter (see Díaz Bonilla, 2008 and forthcoming). It is clear, however, that future trends for agricultural growth and prices will depend (in addition to the usual impact of population growth, urbanization, and related consumption patterns) on the complex links of energy, agriculture, the resource base, climate change, and the environment (see Figure 30; from Díaz-Bonilla, 2008).

Regarding primary agricultural prices and agricultural growth, during the 1970s energy prices affected these issues mostly through the costs ofproduction (through inputs such as fertilizers and gas/oil) while consumer prices were also influenced by transportation and processing costs. Now the energy-agriculture equation is more complex: In addition to the same production, transportation, and processing links, we have two other channels. First is the competition for land, water, labor, capital, and inputs in the production of biofuels. Second is the impact on climate change of the energy matrix. Though the previous episode of high oil prices led to additional oil discoveries, such as in the North Sea, now simply following a fossil-based growth strategy based on new sources (such as Canada's oil shale) is not feasible, given the climate-change constraints.

Therefore, projections of agricultural prices and growth on any forecasting horizon are more linked to energy prices and sources. After the current down cycle is over and even with milder world growth in the medium term, potential imbalances in world energy markets for the next few years are looming (International Energy Agency,

Climate and Environment

Energy

*World Sustainable Energy

'Energy and Poverty 'Energy and Food Security 'Energy and Health

Agriculture

Resource Base

Figure 30 Links among energy, environment, agriculture and poverty.

Table 31 Energy, population, and GDP, 1950-2050
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