Nobel Laureate Calls for Different Commodity Price Measure

April 1, 2002

Robert Mundell, a Nobel economics laureate and professor of economics at Columbia University, thinks commodity price fluctuations wouldn't seem so threatening if they were measured in "a basket of the major currencies," a combination of the dollar, the euro and the yen.

"This would result in a weighted average of interest rates or other variables of those currencies to provide a kind of 'benchmark' value against which other currencies could be weighted," he says. "I've recommended to FAO (UN's Food and Agricultural Organization) that they ask the IMF (International Monetary Fund) to give commodity price indices in special drawing rights, the IMF's unit of account, and in euros as well as U.S. dollars. Then you'll see that the fluctuations are still there, but they are not nearly as great as they appear to be now."

Commodity prices have declined by 30% since a peak in 1995, according to the IMF. Coffee and cocoa prices are at their lowest levels in 30 years, and cotton prices have sunk to a 17-year low. This all spells trouble for developing countries dependent on both agricultural exports and imported processed goods to feed their growing populations, according to FAO.

The downward trend was the subject of a recent consultation at FAO headquarters in Rome. The meeting brought together representatives of the World Bank, the IMF and international commodity organizations, among them, Mundell.

"A lot of trouble and confusion arises because the unit of (commodity price) measurement is not clear," he said. "If prices are measured in currency, they could rise or fall just because of inflation or deflation. We might worry about the stability of money, but we need not be concerned about commodity prices going down or up because other prices (including wages etc.) would be moving the same way."

But since the breakdown of the international monetary system in the early 1970s, there have been fluctuating exchange rates and "so that can lead to a bias in our measurement of commodity prices. It makes a difference if you're talking about commodity prices in dollars or yen or some other currency. So is there really a major commodity problem?"

There is a problem insofar as the dollar price of commodities has declined, he adds. "But the major cause of that has been the strong dollar. That's a large part of the reason because the dollar is a very special animal."

The U.S. economy is 25% of world production -- more with current exchange rates. Until the euro came into being, the U.S. dollar was always the only default international currency, and that has had a very special effect on the way the world economy works, says Mundell.

"Look at the dollar cycle. Since the 1970s, when the international monetary system broke away from fixed exchange rates, a strong dollar has meant weak commodity prices. The dollar cycle does not necessarily cause the commodity cycle. But perhaps the same factors that caused the dollar cycle caused the commodity cycle. One of these factors was a rise in productivity because of new technologies and the Internet economy."