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Abstract

The significance of commodity price instability for the economic development of commodity-exporting countries has been perhaps the dominant theme in the postwar literature on the "commodity problem". One of the contending postwar views of the significance of excessive commodity price fluctuations on the economies of producing countries can be traced back to Keynes. In a now famous memorandum, written in 1942, Keynes argued that commodity price fluctuations led to unnecessary waste of resources and, by resulting in fluctuations in export earnings, had a detrimental effect on investment in new productive capacity and perpetuated a cycle in commodity output and thus in commodity prices. His solution to the problem was to propose the establishment of a series of international buffer stocks for the main primary commodities entering international trade, with finance to be provided by his proposed Clearing Union (which later came into existence, in modified form, as the International Monetary Fund), and with a General Council to oversee and guide the operations of the individual buffer stocks. Keynes' analysis of the problem of excessive instability in commodity prices was not, however, accepted by the postwar school of neoclassical economists, who argued that intervention by governments in the working of commodity markets was not in the interests of producing countries or of the world economy in general. Several distinct arguments have been advanced by neoclassical economists to support the view that market intervention would be harmful to the economies of commodity-exporting developing countries or to world economic growth, or that such intervention is unnecessary since its objective of reducing fluctuations in export earnings could be achieved more efficiently by other means. The purpose of this Working Paper is to show that these arguments, which underlie the perceptions of the 'commodity problem' of developed country negotiators, are based on untenable assumptions or are otherwise invalid or of limited applicability.

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