A COMMON FUND TO FINANCE
INTERNATIONAL
COMMODITY AGREEMENTS
PAUL
D.
REYNOLDS*
The author outlines the framework for the negotiations of a Common
Fund for the financing of commodity stocks pursuant to the Integrated
Programme for Commodities established by UNCTAD in 1976. The author summarizes the progress of negotiations to present and analyzes the
complex issues yet to be resolved. After examining the need for and the
objectives of a Common Fund, the author outlines the detailed operational
and structural components required for a successful Fund. Prospects for
agreement on the establishment of a Common Fund,in this author's view,
depend upon the willingness of developed and developing nations to
negotiate a compromise on several critical issues: whether the Fund should
serve as a source of new financing or a mere pooling of funds held by
existing international commodity agreements; whether the Fund should
finance commodity measures other than stocking; and whether the distribution of voting control shouldfavor the producing or the consuming nations.
INTRODUCTION
Commodity problems have been the subject of widespread study,
concern and negotiation in recent years. The new awareness of the
important role commodities play in the world economy is partially
explained by the energy crisis of 1973. The oil embargo called the
attention of many nations to their heavy dependence upon developing countries for the raw materials so necessary to an industrial
society. It was feared that new cartels would be formed by the major
commodity producers. 1 Looking to the example of the petroleum
exporting states, the developing countries began to realize the poten* B.A., LL.B., Trinity College, Dublin; LL.M., Columbia: Assistant Professor of Law, Texas
Tech University School of Law. The author wishes to thank Praeger Publishers for permission to adopt material from his forthcoming book, P. REYNOLDS, INTERNATIONAL COMMODITY
AGREEMENTS AND THE COMMON FUND (1978).
1 See Bergsten, The Threat From the Third World, FOREIGN POL'y, Summer 1973, at 102;
Krasner, Oil is the Exception, FOREIGN POL'y, Spring 1974, at 68 (an often cited debate); Noone,
Materials Report/Shortages, Oil Price Hike Provide Impetus for Look at Policies, 6 NAT'L J. 743,
743 (1974); Frank, Trade Report/U.S. Takes First Hesitant Steps TowarrlShi[t in Commodities Policy, 7
NAT'L J. 913, 914-15 (1975).
887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 887 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
tial importance and influence of their commodity exports. Primary
commodities were suddenly seen as potential leverage in the struggle
of developing countries to increase their development through increasing income. The restructuring of commodity trade thus became
an important component of the demands by developing countries for
a new international economic order. To bring needed new revenues
to their economies, these countries have pushed to create international agreements designed to increase commodity prices and
stabilize prices at those higher levels.
The notion of using trade agreements to redistribute greater income to developing countries has been a fundamental precept of the
Group of 77, the negotiating caucus for the developing countries. 2
Within UNCT AD3 developing countries have often argued that their
terms of trade vis-a-vis the industrial countries have been deteriorating. In particular, they have cited the instability of their commodity
export income. To combat this problem, the Group of 77 met in
Lima, Peru, in November of 1971 and agreed upon the Declaration
and Principles for an Action Programme. 4 Generally known as the
Declaration of Lima, this cohesive set of demands formed the basis
for Third World proposals at the Sixth Special Session of the United
Nations in April of 1974. From this session on raw materials and
development emerged the now famous Declaration on the Establishment of a New International Economic Order 5 and the Pro2 The group of 77, which now includes over 100 developing states, was formed within the
United Nations Conference on Trade and Development (UNCTAD) as a way to caucus
together and thereby increase the negotiating strength of the developing states. The Joint
Declaration of the Seventy-Seven Developing Countries was issued at the conclusion of the 1964
Geneva UNCT AD meeting.
3 The United Nations Conference on Trade and Development (UNCTAD) has become the
major forum for negotiations over issues of world trade and economic development. It was
established at the behest of developing and socialist countries because of their dissatisfaction
with the General Agreement on Tariffs and Trade (GATT) and the U.N. Council for Economic
and Social Development. Within UNCT AD, negotiations are carried on by groups of countries.
The Group of 77's counterparts are Group B, comprising industrialized states (generally the
same membership as the Organization for Economic Cooperation and Development (OECD»,
and Group D, socialist states (except Yugoslavia which is in the Group of 77). The People's
'
Republic of China belongs to no group.
4 The Declaration and Principles ofthe Action Programme of Lima, U.N. Doc. TDIl43 (N ov.
12, 1971) (report adopted by the Ministers of the Group of 77 and circulated by the SecretaryGeneral in connection with Provisional Agenda Item 8 of the UNCT AD 3d sess., held in
Santiago, Apr. 13, 1972). The course of events in UNCTAD's development leading to a
programme for commodities is described in Vastine, United States International Commodity Policy,
9 LAW & POL'y INT'L Bus. 401, 404-46 (1977).
• G.A. Res. 3201,_ U.N. GAOR, Supp. (No. I) (Agenda Item 7), U.N. Doc. N9556 (1974),
reprinted in 13 INT'L LEGAL MATERIALS 715 (1974).
888
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 888 1978
A COMMON FUND
gramme of Action. 6 A central feature of the Programme is the establishment of International Commodity Agreements (ICAs) and an
integrated programme for the commodities exported by developing
countries.
An Integrated Programme for Commodities (IPC) was accepted by
UNCTAD IV when it adopted Resolution 93(IV)7 at Nairobi in 1976.
The IPC seeks to stabilize markets for the primary commodities
exported by the developing countries 8 in order to diminish the disparities between the economic conditions of the developed and developing countries. The basic element of the IPC is a series of International Commodity Agreements establishing buffer stock operations financed by a Common Fund. Common Fund financing would
be used by ICAs to increase the benefits that developing countries
derive from international trade. 9
Within the framework of the Common Fund, two immediate objectives are stated: the stabilization of prices and the increase (and
protection from fluctuations) of real income received by de.yeloping
countries for their exports. 10 The desirability and efficacy' of these
goals have been much disputed among economists.u The relationship of price stabilization to export earnings has been one issue of
particular concern. Developed countries are wary of using ICAs to
increase the incomes of developing countries because they fear that
price stabilization targets set at excessively high levels would cause
inflationary pressures in their own economies. They also fear that
artificially high support prices will lead to a rapid and irreversible
accumulation of stockpiles, since exporters will be able to sell off
surplus stock knowing full well that the commodity organizations will
6
G.A. Res. 3202, _ U.N. GAOR, Supp. (No.1) (Agenda Item 7), U.N. Doc. N9559 (1974),
reprinted in 13 INT'L LEGAL MATERIALS 720 (1974).
UNCTAD, Integrated Programme for Commodities, U.N. Doc. TD/RES/93(IV) (June 10,
1976) (Agenda Item 8 of the UNCTAD 4th sess., held at Nairobi, May 5,1976) [hereinafter
cited as Resolution 93(IV)].
8 !d. For a description of the elements of the Programme, see P. REYNOLDS, INTERNATIONAL COMMODITY AGREEMENTS AND THE COMMON FUND (1978). For a briefer description and
full reference to the relevant U.N. documents, see Erb & Fisher, U.S. Commodity Policy: What
Response to Third World Initiatives?, 9 LAw & POL'y INT'L Bus. 479 (1977).
9 H. O'NEILL, A COMMON INTEREST IN A COMMON FUND 18 (1977).
10 See UNCTAD, New Directions and New Structures for Trade and Development, U.N.
Doc. TD/183/Rev. 1, at 22 (1977).
11 See INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT & INTERNATIONAL
MONETARY FUND, JOINT STAFF STUDY, THE PROBLEM OF PRIMARY PRODUCTS 42 (1969) [hereinafter cited as IMF/IBRD JOINT STAFF STUDY]; A. LAw, INTERNATIONAL COMMODITY AGREEMENTS
1-33 (1975); A. MACBEAN, EXPORT INSTABILITY AND ECONOMIC DEVELOPMENT (1966).
7
889
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 889 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
have to purchase this surplus to maintain the price levels. The effect
would be that funds lent by the developed countries to the commodity
organizations would never be repaid. Whatever the merits of these
views, the result has been that industrial countries are reluctant to
commit substantial financing to the Common Fund.
Simultaneous negotiations are being carried on to establish ten
ICAs for an initial core group of eighteen commodities. 12 Progress
has been slow but steady. At the present time three ICAs have authorized stocking measures: the Cocoa, Tin and Sugar Agreements. 13 Prospects also appear good for conclusion of agreements
on rubber and tea, and much work has been done on new arrangements for coffee and copper. The negotiations for wheat and
other grains are taking place outside the framework of the IPC so
Fund financing will not be required.
Throughout the negotiations on individual agreements the focus
of attention has been on the Common Fund as the source of financing
for thes,S new agreements. The next section of this article examines
the present state of both ICA and Fund negotiations. The rest of the
article addresses such topics as the purpose, scope, financing and
structural elements of a prospective agreement establishing a Common Fund. Because prospects for successful conclusion of a Fund
agreement remain uncertain, these remarks provide only a tentative
outline of the elements and safeguards required in such an agreement. Such a tentative study is nonetheless helpful in evaluating the
potential effects, strengths and weaknesses of any subsequent agreement to which the United States might become a party.
PROGRESS OF
N EGOTIA TIONS
Although Resolution 93(IV)14 was adopted by consensus, recent
developments indicate that the Resolution's meaning is understood
12 These eighteen commodities were adopted in Resolution 93(IV), note 7 supra. The ten
"core" products for which early agreement is hoped are coffee, cocoa, tea, sugar, copper, tin,
rubber, cotton,jute and hard fibres. The eight "other" commodities are bananas, vegetable oil,
meat, tropical timber, iron ore, bauxite, manganese and phosphates. The Resolution specifically provides for additions or amendments at a later date. Id. art. II. UNCT AD had
originally proposed inclusion of wheat and other grains but these were dropped when it
became clear that the initial Programme aimed to cover export products of primary importance to developing countries. Developed nations are the largest exporters of grains.
13 International Cocoa Agreement, 1975, opened for signature Nov. 10, 1975, U.N. Doc.
TD/COCOAA/I0 (1976); International Tin Agreement, done June 21, 1975, 28 U.S.T. 4619,
T.I.A.S. No. 8607, _ U.N .T.S. _ (entered into force definitively for the United States onJune
14,1977); International Sugar Agreement, 1977,done Oct. 7, 1977, U.N. Doc. TD/SUGAR.9/10
(1977) (entered into force provisionally for the United States on Jan. I, 1978, T.I.A.S. No. _).
14 Resolution 93(IV), note 7 supra.
890
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 890 1978
A COMMON FUND
differently by developing and developed countries. Developing
countries in the Group of 77 argue that the Resolution calls for the
establishment of a Fund as a source of finante. Developed countries
maintain that this is only one possible meaning of the Resolution. 15
They prefer the Fund to be a mere pooling of the finances of
commodity organizations. 16
Resolution 93(IV) sets out an ambitious schedule of simultaneous
negotiations to take place by the end of 1978,17 with preparatory
meetings and a negotiating conference on the Common Fund to take
place by March 1977. 18 Three preparatory conferences were followed by the March 1977 negotiating conference. That conference,
however, merely served as a forum for the restatement of previously
known positions and failed to bring opponents any closer to compromise on the fundamental issues at stake. The conference did
agree to resume in November 1977, and it is this last session which will
be examined below.
It is important to note, however, that a series of meetings held
outside the framework of UNCTAD appeared to advance negotiations between March and November of 1977. During the Paris Conference on International Economic Cooperation (Paris Conference),19 developed states acceded to one, vaguely defined, concession.
The heads of state of the EEC countries meeting in Rome were able
to agree that there should be a Common Fund, although they envisioned it more as a clearing mechanism than the sole source of
funds. 20 With at least a general objective in mind, by the close of the
Paris Conference, the participating developed and developing countries could agree upon the "[e]stablishment of a common fund with
purposes, objectives and other constituent elements to be further
negotiated in UNCT AD."21
Reaction from proponents of the IPC and the Common Fund was,
15 The United States government made known its reservations at UNCTAD IV in May 1976,
in panicular that the Common Fund would have to "await the results of developments on
individual funds of ICAs. See Vastine, supra note 4, at 460-61.
16 This fundamental disagreement between the developing and developed countries is
examined further at notes 45-53 infra and the accompanying text.
17 This deadline clearly will not be met. See note 36 infra.
18 See Resolution 93(IV), note 7 supra.
19 See Text of Final Communique, reprinted in 76 DEP'T STATE BULL. 650 (1977).
20 See Wall St. j., Mar. 28, 1977, at 14, col. 3; see also External Relations, EUROPEAN REP., No.
408, Apr. 8, 1977, at l.
21 Text of Final Communique, supra note 19, at 651.
1978]
891
HeinOnline -- 10 Law & Pol’y Int’l Bus. 891 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
of course, favorable. Gamani Corea, Secretary-General ofUNCTAD,
stated that the decision of the Paris Conference on the Common Fund
"has given an undoubted impetus to the negotiations on this question.
It is now possible to move away from the debate on whether or not a
Fund should be established and concentrate on the character and
modalities of the Fund."22
Regrettably, agreement was more imagined than real. It soon became apparent that a serious stumbling block remained concerning
the Fund's basic character and nature. American Under Secretary of
State Richard Cooper, in explaining the Paris Conference to the
Congress, said that "the Group of8 [industrial nations, also known as
Group B] has not accepted the UNCT AD conception of a common
fund."23 In fact, in the interim between the March and November
meetings of UNCTAD's negotiating conference, these Group B
countries developed an alternative concept of the Fund's structure.
They formally proposed that the individual ICAs would allocate part
of their funds to a "fund held in common" while providing stock and
other guarantees against which market borrowing could be based. 24
Primary responsibility for the necessary financing would be placed
with the ICAs, thus allowing the Fund to have its own finances
without direct contributions.
The Group of 77 rejected Group B's proposed outline of a Fund
agreement as "not only limited in scope and self-contradictory in
purpose, but above all so narrowly conceived as to amount to virtual
negation of the kind of Common Fund envisioned at Nairobi."25 The
Group of 77 rejected any approach solely dependent on the pooling
22 Speech by Gamani Corea, Secretary-General of UNCT AD, to the 63rd session of
ECOSOC, in Geneva Ouly 13, 1977); excerpts reprinted in UNCTAD MONTHLY BULL., September
1977.
23 Cooper, Department Discusses Results of GIEG Meeting, 76 DEP'T STATE BULL. 92, 96
(1977) (statement by Under Secretary for Economic Affairs Richard N. Cooper submitted to
the Joint Economic Committee).
24 UNCT AD, Elements for the Basis of a Common Fund, Proposal Submitted by Countries
Members of Group B, U.N. Doc. TD/IPC/CF/CONF/L.5,at2-3(Nov. 7,1977) (Agenda Item 90f
the U.N. Negotiating Conference on a Common Fund under the Integrated Programme for
Commodities, 2d sess., held at Geneva, Nov. 7, 1978). For an outline of how the Fund would
borrow against the stocks of ICAs, see UNCTAD, An Illustration of the Operation of the
Financial Aspects of the Proposal Submitted by Countries Members of Group B, U.N. Doc.
TD/IPC/CF/CONF/L.5/Add. I (Nov. 17, 1977) (Agenda Item 9 of the United Nations
Negotiating Conference on a Common F~nd under the Integrated Programme for Commodities, 2d sess., held at Geneva, Nov. 7, 1977).
25 Statement made by Yugoslavia on Behalf of the Group of 77 to the Plenary Meeting on
Nov. 18, 1977, United Nations Negotiating Conference on a Common Fund under An
Integrated Programme for Commodities, Second Part, Geneva (Nov. 7, 1977) (mimeo).
[Vol. 10:887
892
HeinOnline -- 10 Law & Pol’y Int’l Bus. 892 1978
A COMMON FUND
of resources of individual ICAs and not requiring direct contributions by all states. They also maintained that Group B was unwilling to
allow the Common Fund to finance measures other than stocking.
In reply the members of Group B commented on the "pessimistic
assessment" of the Group of 77. They pointed out that while direct
contributions were not called for, the Group B proposal was a major
new commitment to place their members' borrowing capacity at the
disposal of ICAs. Group B also reaffirmed its willingness to discuss
the relative responsibility of producers and consumers in providing
the necessary financial arrangements. 26
At the forefront of debate during the next negotiating sessions, in
November and December of 1977, was the issue of voting control,
which had never been openly dealt with at previous meetings. Group
B countries wanted to ensure that "all concerned are satisfied that the
fund will be responsibly managed, and that decisions will be taken on
a basis which safeguards the interests of all participants."27 The
developing countries maintained, however, that voting rights should
not be tied exclusively to capital subscriptions and that developing
countries should be ensured a decisive role. 28
Other countries presented views which fell between the divergent
positions of these two groups. China supported the Group of 77
position uniformly while other socialist states paid lip service to the
needs for a Fund but desired to avoid direct contributions and to limit
its activities to stock financing. 29 The Nordic countries advocated
much greater concessions by their fellow industrialized nations, calling specifically for direct government contributions and financing of
additional measures other than stocking. 30
As the negotiating conference became polarized and efforts to
reconcile differences broke down, the Group of 77 called for ad26 Common Fund Negotiating Conference, Text of Group B Statement Delivered at Plenary
on Nov. IB, 1977 (unclassified telegram from U.S. Mission Geneva to the Department of State,
Washington, D.C., Nov. IB, 1977) (mimeo).
27 Group B Opening Statement delivered by Spokesman Barrass (United Kingdom) on Nov.
7, 1977 (unclassified telegram from U.S. Mission Geneva to the Department of State, Washington, D.C., Nov. B, 1977) (mimeo).
28 UNCTAD, Draft Report of the United Nations Negotiating Conference on a Common
Fund Under the Integrated Programme for Commodities, Second Part, U.N. Docs. TDI
IPC/CF/CONF/L.7 and Add. I (Nov. 30, 1977) [hereinafter cited as Draft Report of the
Common Fund Negotiating Conference]. This document was not officially adopted.
29Id.
Joint Nordic Statement in Plenary, United Nations Negotiating Conference on a Common Fund under the Integrated Programme for Commodities, Second Part, Geneva (Dec. I,
1977) (mimeo).
30
893
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 893 1978
LAW & POLICY IN INTERNATIONAL BUSINESS
journment, stating that "it is futile to continue until the developed
countries demonstrate the necessary political will to make future
negotiations meaningful."31
In the closing session, Mr. Sekulic of Yugoslavia, chairman of the
Group of 77, called for adjournment and denounced the developed
countries for being unwilling to agree upon the fundamental aspects
of a Common Fund consistent with Resolution 93(IV) and thus failing
to fulfill their commitments made at the Paris Conference. 32 Group B
denied this charge, stating that their counterproposal was in keeping
with the understanding reached at the Paris Conference. Group B
countries pointed out that, in regard to financing measures other
than stocking, they have consistently kept an open mind. Pointing to
the issue of direct contributions, Group B countries made it clear that
they agree that the fund will, in one way or another, receive substantial financial support from governments. The disagreement was only
over what was a proper channel through which that support should
come. 33 By the close of the 1977 conferences the dispute over these
two issues, financing and direct contributions, left little time to deal at
all with the third crucial issue-management and voting contro1. 34
Since December 1977, informal talks have been going on in an
effort to renew negotiations. In mid-December representatives of
100 U.N. member countries urged exploration of possible resumption of talks. 35 As of July 1978 no agreement to renew negotiations
had been reached. 36
N.Y. Times, Dec. I, 1977, § D, at I, col. 4. See also Wall St. J., Dec. 2,1977, at 22, col. 3.
Statement Made by Yugoslavia on Behalf of the Group of 77 on Dec. I, 1977, United
Nations Negotiating Conference on a Common Fund under the Integrated Programme for
Commodities, Second Pan, Geneva (Nov. 7, 1977) (mimeo).
33 Group B Statement Made During Final Session of the Common Fund Negotiating Conference on Dec. I, 1977 (unclassified telegram from U.S. Mission Geneva to the Department
of State, Washington, D.C., Dec. 2, 1977) (mimeo).
34 See Wall St. J., note 31 supra. However it did become apparent that voting control was an
issue giving rise to serious conflict. See text accompanying notes 140-64 infra.
35 7 IMF SURVEY 27 (1978).
36 The Ad Hoc Intergovernmental Committee for the IPC adopted a resolution calling for a
reconvening of the Negotiating Conference, hopefully around November 13-30, 1978. The
Committee also extended the timetable of the IPC for one year, to the end of 1979. The
Committee reponed that preparatory meetings had not yet been held on two of the IPC
commodities-bananas and bauxite. UNCTAD MONTHLY BULL., August 1978, at 3. See also
UNCTAD, Comprehensive Report on Progress under Conference Resolution 93(IV), U.N.
Doc. TD/B/IPClACl20 (june 15, 1978) (Provisional Agenda Item 2 of the Ad Hoc Intergovernmental Committee, 6th Sess., held at Geneva, July 10, 1978); UNCTAD MONTHLY
BULL., July 1978, at 3-4 (UNCTAD's Secretary-General is interviewed on the prospects for
agreement at UNCTAD). For alternating optimistic and pessimistic news analysis of prospects
for agreement, see Wall St. J., May 5, 1978, at 24, col. 1 and id., June 1, 1978, at 26, col. 1.
31
32
894
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 894 1978
A COMMON FUND
The breakdown in negotiations underscores the differences between the developed and developing countries over emerging issues
in the new international economic order. An understanding of those
issues and their possible resolution requires an in-depth examination
of the purpose, scope, financing and structural elements of a prospective agreement on the proposed Common Fund.
PuRPOSES AND OBJECTIVES OF THE COMMON FUND
The Need for Increased Financing
As stated above, the primary purpose of the Common Fund
would be to provide financing to international commodity organizations for the cost of operating a program of buffer stocks.
According to the Secretariat of UNCTAD, the great importance
attached to negotiating separate financing for the IPC stems from the
fact that inadequate financing has long been a major obstacle to
commodity stabilization. U ntiI the problem of financing is resolved,
further agreements on the Integrated Programme for Commodities
will not easily be concluded.
[T]he negotiation of commitments on international commodity trade, including arrangements for stocks, would be
greatly assisted, and the differing national interests more
easily reconciled, in the larger context of a number of commodity negotiations initiated or contemplated more or less
concurrently, if there were a financial authority ready to
support operational arrangements of an appropriate kind.
The secretariat believes that a common facility or fund for
stock financing could act as a catalyst ... [and] would help to
resolve the difficulties experienced in the past when governments have discussed or negotiated a commodity-bycommodity approach to stabilization arrangements. 37
This rationale is not accepted by the Group B developed countries
who believe that lCAs have not been hindered by a lack offinance. 38
UNCT AD, An Integrated Programme for Commodities: A Common Fund for the
Financing of Commodity Stocks, V.N. Doc. TD/B/C.I1166!Supp.2 (Dec. 12, 1974) (Provisional
Agenda Item 5 of Report of Comm. on Commodities, Trade & Dev. Bd., for the 8th sess.,
held at Geneva, Feb. 10, 1975).
38 See UNCT AD, Report of the Second Preparatory Meeting for the Negotiation of a
Common Fund, U.N. Doc. TD/B/IPc/CF/6 Annex I, at 2 (Feb. 10, 1977) [hereinafter cited as
37
895
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 895 1978
LAW & Pouey IN INTERNATIONAL BUSINESS
This view is supported by the fact that secretariats of existing ICAs
oppose the notion of a Common Fund, but their opposition may
derive from the fear that their present independent financing will be
merged with the new Common Fund. 39 In this regard, the United
States has argued that creating a Common Fund before establishing
additional commodity organizations is like putting the cart before the
. horse. Underlying the U.S. rationale may be the fear that
the Fund will prove to be too effective as a catalyst, stimulating a
rush to form commodity organizations to tap this new source of
funding. 40
Lack of adequate finances has been a problem in previous Tin
Agreements 41 and was mentioned by Bolivia as the basis for its refusal
to ratify the most recent agreement. 42 In the case of the Cocoa
Agreements, however, pricing problems rather than finance appear
to have been the cause of difficulties. 43 While evidence dealing with
existing agreements does not go to the root of the UN CTAD assertions
on financing, unsuccessful negotiations on other ICAs show that
financial difficulties are only one of the many obstacles to greater use
of ICAs. Other obstacles, such as the inevitably complex and time
consuming nature of such negotiations may be equally significant. 44
Common Rather than Joint or Individual Financing
The reason UNCT AD advocates an independent Common Fund
rather than self-financing within each I CA can be explained in part by
Report of the Second Preparatory Meeting]. The Swiss Government lias also denied the
UNCT AD rationale. See UNCT AD, Proposals by Governments, Addendum (comment by
Switzerland on the Question of a Common Fund), U.N. Doc. TD/B/IPClCF/3/Add.7 (Feb. 25,
1977) (Agenda Item 2 of the Third Preparatory Meeting for the Negotiation of a Common
Fund, held at Geneva, Feb. 21, 1977) [hereinafter cited as Swiss Comments].
39 See Prinskey, Moves to Resume North-South Dialogue Get Under Way: Developments Seen Soon,
Wall St.j., Mar. 7,1977, at 13, col. 1.
40 See J. BEHRMAN, INTERNATIONAL COMMODITY AGREEMENTS (1977).
41 See generally Barkman, The International Tin Agreements, 9 j. WORLD TRADE L. 495 (1975).
42 Although subsequently agreeing to the new agreement, Bolivia has demanded that the Tin
Agreement be funded by consumer nations and not merely producing states. See 37 FACTS ON
FILE 169 (1977).
43 See Kofi, The International Cocoa Agreements, 11 j. WORLD TRADE L. 37, 37 (1977).
44 In the case of cocoa (which has adequate financing), the 1972 Agreement took 17 years to
draft, negotiate, and ratify. See id. at 42-44. A U.N. study asserts that most developed market
economy countries are still giving the problem of development a low priority. UNCTAD, Trade
and Development Policies in the 1970s: Report by the Secretary-General of VNCT AD for the
First Review and Appraisal of the Implementation of the International Development Strategy,
V.N. Doc. TD/B/429/Rev.l, at 15 (1973). For a comprehensive description oflCA negotiations
by a participant, see Bilder, The International Coffee Agreement: A Case History in Negotiation, 28
LAw & CONTEMP. PROB. 328, 347-75 (1963).
896
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 896 1978
A COMMON FUND
the integrated nature of the IPC and in part by the need to increase
the line of credit available to each buffer stock. Price cycles of commodities in the IPC are out of phase; prices of several commodities
are going up while others are going down. Because of this, some
buffer stock managers would be selling while others are buying.
Independent studies of ten core commodities show that their fluctuations usually do not move together and that this decreases the total
amount of funds needed under the IPC as compared with the funds
needed by a set of individual funds. 45
Industrialized countries advocate a "pooling" of funds which they
maintain would preserve both the benefits obtained under a Common Fund and the integrity of individual ICAs. In a pooling arrangement each ICA would raise its own financial resources and
deposit these funds into a common "pool," borrowing from it as
necessary.46 The socialist countries (Group D) agreed with the developed nations that the Fund should be a "pool" of resources held by
the ICAs, although they left the door open for possible "direct,
limited subcriptions" to the Fund. 47 This is in line with the pattern
adopted by the socialist states in the past of avoiding or minimizing
contributions to international financial organizations. Groups Band D
feel that financing should come largely from the ICAs because the
states that produce and consume individual commodities will always
be the most responsive to the needs of that commodity's organization.
They also argue that present negotiations are complex enough without having to take on complete renegotiation of existing agreements
which have self-financing provisions.
UNCT AD argues that only by way of a separate Common Fund
which would itself raise financing for relending to commodity organizations can the historical financial impediment to successful ICA
negotiation be overcome. Under this approach, the Fund is not a
"pool" but is a "source"-a source of both funds and a stimulus to
negotiations of ICAs. 48
In the most recent rounds of negotiation,49 the developed countries submitted a proposal for a hybrid scheme combining elements of
both the "pool" and "source" approaches. They proposed that the
supra note 40, at 40--41.
H. O'NEILl, supra note 9, at 29.
47 Draft Report of the Common Fund Negotiating Conference, supra note 28, at 6.
48 Id. at 3-5.
49 See Wall St.]., Nov. 8, 1977, at 16, col. 4; id., Dec. 2,1977, at 26, col. 5; N.Y. Times, Dec. 1,
1977, § D, at 1, col. 3.
.. ]. BEHRMAN,
46
897
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 897 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
capital structure of "a common fund should be based on deposits
from these [I CAs] which should match the rights to draw credits from
the Fund with their obligations to make deposits with it, and the
Fund's rights to withdraw deposits from [ICAs] with its obligations to
offer them a guaranteed tranche of credit."50 The Fund would be a
"source" in that it would borrow additional money for relending to
commodity organizations. This borrowing would be secured by stock
warrants (warehouse receipts) lodged with the Fund by ICAs as they
purchased commodity stocks with their borrowed funds. The Fund
could also borrow against government guarantees. 51 These guarantees would be from Group B countries, who consider their offer to·
place some of their borrowing capability at the Fund's disposal to be a
.
.
major concessIOn.
The Group B hybrid proposal upset UNCTAD and the Group of
77, who had felt that the establishment of a Common Fund had
alread y been agreed to by developed countries at the 1977 Paris
Conference. 52 The Group of77 charged that Group B's proposal was
in conflict with the agreement reached at the 1977 Paris Conference
and that it was self-contradictory and "so narrowly conceived that it
virtually negated the kind of common fund envisaged in resolution
93(IV)."53 The Group felt there was no point in continuing negotiations. No date has been agreed upon for resumption of negotiations
on the Fund itself although 100 U.N. member countries have recommended that consultations be held.
Draft Report of the Common Fund Negotiating Conference, supra note 28, at 7.
[d. at 8.
52 The Conference on International Economic Cooperation held its final meeting in Paris on
June 2, 1977. The text of the final communique states that participants agreed upon, inter alia,
"[e ]stablishment of a common fund with purposes, objectives and other constituent elements to
be further negotiated in UNCTAD." Text of Final Communique, supra note 19, at 651.
Developing states would have done well to listen to the explanations of this "agreement" given
by representatives of industrialized states. Under Secretary Cooper of the U.S. State Department stated to Congress that a common fund in the U.S. view was to be established "in
conjunction with individual agreements to stabilize prices." Cooper, supra note 23, at 94. He
further stated, "[a]s the language implies, the Group of 8 [industrialized countries] has not
accepted the UNCTAD conception of a common fund." [d. at 96 (emphasis added). C. Fred
Bergsten, Assistant Secretary of the U.S. Treasury, made it clear that, in addition, these
countries did not agree that there was a need for early establishment of the Fund. Bergsten
stated, "[w]e reject the premise on which the proposal is based-that it is necessary to put
funding in place to permit the conclusion of international agreements on particular commodities." Dep't of Treasury News Release, June 27, 1977, at 10.
53 Draft Report of the Common Fund Negotiating Conference, supra note 28, at II.
50
51
898
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 898 1978
A COMMON FUND
Price and Income Stabilization
It seems that all sides accept as an objective for the Fund a general
goal of "stabilization," although it is not clear whether this refers to
price stability or export income stability. Eleven separate policy objectives have been suggested for stabilization activities, namely,
stabilization of prices, foreign exchange earnings, quantities, producer incomes, primary producing land incomes, balance of payments of world trade, terms of trade, business cycles, markets for
industrial production and political stability.54
The most generally accepted goal of a Common Fund is price
stabilization. It is clear, upon a consideration of its causes, that price
instability can never be totally eliminated, only lessened. The output
of agricultural commodities is subject to the vagaries of disease, pests
and weather. Mineral commodity trade is subject to the general
economic conditions in the industrialized countries and, to a lesser
degree, to the periodic upheavals of politics and wars. All commodities are subject to long term general market trends, such as decline in
demand or substitution of synthetics. These market effects are particularly severe in agriculture because of the lack of control over many
small producers and the inability to vary production on short notice,
as contrasted to industry, where production can quickly be cut back
when demand or prices decline. A Fund programme primarily
geared to stocking can do nothing to attack these causes but can only
modify their effects.
It is important to note that income stabilization will not necessarily
result from price stabilization. In the case of commodities where
changes of supply predominate, the prices and volume of exports
tend to move in opposite directions, thereby moderating fluctuations
in earnings. However, where changes in demand predominate, prices
and volume tend to move in the same direction, intensifying swings in
earmngs.
Consider for the moment agricultural products for which demand
is fairly stable but which are subject to great swings in supply. When a
bumper crop occurs, the price drops as quantity rises. Conversely,
when a natural disaster leads to a shortage, the price goes up, but
because the quantity supplied has fallen, overall income may decline,
or increase only slightly, if at all. Fluctuations in earnings thus do not
necessarily follow changes in price. Solutions to one type of instability
54
For a discussion of leA objectives, see A. LAw, supra note 11, at 75-85.
899
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 899 1978
LAW & POLICY IN INTERNATIONAL BUSINESS
are not necessarily applicable to others. Stabilizing the price of a
commodity such as sugar cannot control decreases in demand or
problems in production, yet either factor could cause a drop in sugar
export earnings.
Price stabilization might actually destabilize commodity export earnings in some situations. 55 Where a fall in supply results in a rise in
price while demand remains unchanged, income can remain the
same or rise. But if the price is stabilized there is simply less to sell at
the same price. Price stabilization, in this case, causes lower income. In
some cases, then, UNCT AD must elect which to stabilize-price or
income. One commentator has noted that the integrated approach
covering many commodities will permit trade-offs, as between states
whose incomes are destabilized, through price stabilization for one
commodity and price increases for another. 56 The IPC thus leaves
the matter of stabilizing income and prices in a somewhat ambiguous state. It may also seem that in trying both to improve income
and protect it from fluctuations, that ambiguity is made inevitable,
but this is not necessarily so. Improved income can be accomplished through higher prices supported by stocks and multilateral
commitments to buy and sell agreed quantities at higher prices, while
the effect of income fluctuations can be moderated through compensatory finance.
Just as providing funds for price stabilization will not guarantee the
result of income stabilization, neither can it be guaranteed that the use
of buffer stocks will reverse long term price decline. A buffer stock can
only alter long term price decline if it has continuous financial capacity to buy and never sell, a capacity which the Fund clearly will not be
able to support. Some supplementary source of control must be
introduced to shore up prices. Export or production controls aimed
at reducing supply can force prices, and hence income, up over the
long run,57 but UNCTAD proposals on stocking arrangements do
not require ICAs to use such production or export controls.
Whenever stocking is used to raise prices, the financial capacity of the
Common Fund should be protected by requiring that production
controls be used to supplement stocking arrangements. This is a basic
55 Meier, UNCTAD Proposalsfor International Economic Reform, 19 STAN. L. REV. 1173, 1195
(1967); M. RADETZKI, INTERNATIONAL COMMODITY MARKET ARRANGEMENTS 6--8 (1970).
56 H. O'NEILL, supra note 9, at 21.
57 See Kreinin & Finger, A Critical Suroey of the New International Economic Order, 10 J. WORLD
TRADE L. 493, 503 (1976); Loumiet, Toward an International Commodity Agreement on Petroleum, 5
DENVER J. INT'L L. & POL'y 485, 493 (1975).
900
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 900 1978
A COMMON FUND
legal safeguard which, it appears, should be required for an effective
Common Fund agreement.
Other objectives identified for the IPC include the reform of commodity production; greater access to markets; diversification into
processing; improvements in competitiveness through research and
development programs; promotion of natural products; and improvements in marketing and distribution. In each of these other
objectives resides the subsidiary goal of increasing export earnings of
developing countries. Although there are constant references in the
UNCT AD documentation 58 to stabilizing both export income and
prices, it is safe to conclude that it is income stabilization which is of
real interest to the Group of 77.
Financing Measures Other Than Stocking
In the preparatory meetings leading up to the March 1977 negotiating conference on the Common Fund, the objective of price stabilization emerged as an almost universally accepted legitimate use of fund
resources. 59 There was, however, widespread disagreement as to
whether Fund financing should be used for other IPC goals, such as
diversification. The Group of 77 urged financing of measures other
than stocking, while Group D socialist states desired clarification of
the content and scope of "other measures" .60 Norway accepted the
goals set out for the IPC Programme but felt that financing measures
other than stocking must be based on the cooperation of consumers as
well as producers and through a different "window" under separate
lending criteria. 61
The most recent report of the Secretariat of UNCTAD acknowledges that the "main function of the Fund would be to finance
commodity stocking arrangements," but that "[h]ow far the fund
might assist in the other international measures under the Integrated
58 See, e.g., UNCT AD, An Integrated Programme for Commodities: The Role of International Commodity Stocks, U.N. Doc. TD/B/C.1I166/Supp. I, at 5-6 (Dec. 12, 1974) (Provisional
Agenda Item 5 of Report ofComm. on Commodities, Trade & Dev. Bd., for the 8th sess., held at
Geneva, Feb. 18, 1975) [hereinafter cited as International Commodity Stocks] .
• 9 See Repon of the Second Preparatory Meeting, supra note 38, at 6-8.
60 [d. at 8. Subsequently, Group B moderated its opposition to a point where it would
consider Fund financing of other measures but desired clarification on the nature of these
measures. See id. at 9-10; Draft Report of the Common Fund Negotiating Conference, supra
note 28, at 6.
61 UNCTAD, Proposals by Governments, U.N. Doc. TD/B/IPc/CF/3 (Nov. 1976) (Provisional Agenda Item 3 of the Preparatory Meeting for the Negotiation of a Common Fund, held
at Geneva, Nov. 29, 1976) [hereinafter cited as Proposals by Governments].
1978]
901
HeinOnline -- 10 Law & Pol’y Int’l Bus. 901 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
Programme is a matter for decision by governments, taking into
account the resources that would be required and the extent to which
the commodity organizations themselves, or existing international
financing institutions, would undertake these activities."62 This suggests some link with existing IMF, World Bank or European Development Fund operations. The report goes on to suggest a compromise which would not impede the development of the powers of the
Fund, namely "agreement in principle that the specific purpose of the
Common Fund is the financing of commodity stocks and such other
measures as the governing body of the Fund may determine."63
The Common Fund has been endorsed for a number of somewhat
divergent reasons and its various proponents expect it to fulfill differing objectives. This absence of a clearly defined rationale and set of
objectives makes it difficult to evaluate whether the Fund proposals
. will fulfill their underlying policy goals.
SCOPE OF PROPOSED FUND
The first factor in determining the scope of any Fund is its
commodity coverage. The Fund would initially provide financing for
the ten core commodities for which early agreement on establishment
of stocks is hoped. It is not envisioned that stocks, and hence stock
financing, would be necessary in the case of all eight other commodities. For example, stockpiling of certain perishables, like bananas, is
not feasible. Stocks are to be established on a scale sufficient to assure
complete disposal of production, based on a realistic assessment of
consumption, and to assure adequate supplies for importing countries.
FINANCING: NEEDS AND SOURCES
Controls Over the Factors Affecting Financing
The decisions on stock size, initial purchase price and subsequent
buffer range, decisions that will not be made directly by the Fund, are
all vital to determination of Fund finances. If the Fund is established
62 UNCT AD, Consideration of Issues Relating to the Establishment and Operation of a
Common Fund, U.N. Doc. TD/B/IPc/CF/2, at 5 (Nov. 10, 1976) (Provisional Agenda Item 3 of
the Preparatory Meeting for the Negotiation of a Common Fund, held at Geneva, Nov. 29,
1976) [hereinafter cited as Issues Relating to a Common Fund).
63
[d.
902
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 902 1978
A COMMON FUND
at an early stage its size and structure would likely affect the decisions
of individual ICAs. Ultimately the Fund should have the power, as
recommended by the Secretariat of UN CT AD, to assess the economic
soundness of a commodity agreement and refuse financing if a proposed agreement is unsound.
No firm guidelines have been set out as to the size of stocks to be
established by the ICAs. Thus, if a $6 billion Fund is established there
will be nothing to prevent a new Copper ICA from establishing a
stock size requiring initial funding of $3-$4 billion. 64 UNCTAD, it is
assumed, will informally guide negotiations on stock size for each
commodity. One clear advantage to early estabiishment of a Fund
would be that its terms and conditio~s governing assistance to commodity organizations would be known in advance while many ICAs
are still to be negotiated. UNCT AD has suggested that the Fund
management be given power to set guidelines, price objectives, adequacy of buffer stocks and supply management measures. 65 This
would be a useful tool in harmonizing the standards and safeguards
existing in ICAs within the IPC.
The IPC also encourages the use of multilateral commitments to
regulate supply, demand and price at the same time. Through such
multilateral commitments importing members agree to buy all or a
large portion of their imports from exporter members and the exporters agree to supply the quantities agreed upon within a stated price
range. 66 Such commitments can be highly supportive of buffer stock
operations, since they provide a floor under supply, demand and
price, but to be successful they must cover a significant share of the
world market. It is thus strongly urged that, as a pre-condition to any
financing of leAs over an initial minimum finance level, the organization should secure multilateral commitments which cover the majority of trade in each commodity. Such a pre-condition clause should
act as an incentive for negotiators to include multilateral commitments within ICAs, thus providing an additional safeguard against
drainage of funds from the Common Fund.
64 However, there is a recent trend to bring commodity negotiations under the UNCT AD
umbrella even if study groups had existed in other forms such as the Food and Agricultural
Organization. This has helped the Group of 77 by permitting discussion to take place within an·
organization of much wider membership, where they have a larger number of votes. It has also
meant that decisions are not necessarily made by just those producers and importers directly
involved with the particular commodity under consideration. The United States, in particular,
has objected to this trend. See generaUy Vastine, supra note 4, at 466, 470-71.
6S Issues Relating to a Common Fund, supra note 62, at 9.
66 Loumiet, supra note 57, at 495.
1978]
903
HeinOnline -- 10 Law & Pol’y Int’l Bus. 903 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
Capital Requirements
1. Size of Stocks
Perhaps the most important political and economic decision of the
Common Fund will be the size of minimum stock levels. An early
UNCTAD study made cost estimates based on the need to hold one
and one-half to three months annual supply of world trade in stock. 67
The three month period is an average based on weighing a large
number of factors such as support prices, the margin between floor
and ceiling prices, and the sensitivity of production and consumption
to random factors. Lord Keynes, in a memorandum to the British
Treasury in 1942, thought that three months was in the range of the
appropriate time period although probably too short. 68 Not all commodities require a three month stock in order to control market
fluctuations, but, if it were decided to hold all stocks at three month
rather than one and one-half month levels, 100 percent additional
financing w<;mld be required.
2. Cost of Acquisition
The UNCTAD secretariat's latest calculations estimate that $4.5 to
5 billion would be necessary to finance stock arrangements for the ten
core commodities; an additional $1 to 1.5 billion would be required to
finance other commodities and non-stocking activities. 69 Initial
financing of about $3 billion may be required by 1979. The total
financial requirement of $6 billion is predicated on the assumption
that the Fund would be the only source of finance for these operations.70 Although it is apparently assumed that the ICAs would pay
the full purchase price, it might be possible for the ICAs to buy on
margin, putting down only 10 or 20 percent. Certain additional
assumptions are made which affect the size of stock levels required
for the operation of the Common Fund.
67 International Commodity Stocks, supra note 58, at 21. The figures suggested for copper
have been criticized as inadequate. See Maidenberg, Commodities: Price Pacts-Aid by Another
Name', N.Y. Times, Mar. 21,1977, at 46, col. 2; Wall St. j., Mar. 18,1977, at 26, col. 1.
68 See Keynes, The International Control of Raw Materials (a Memorandum to the Treasury,
April 14, 1942), reprinted in 4 j. INT'L ECON. 299, 310 (1974).
69 UNCTAD, Common Fund: Financial Requirements, U.N. Doc. TD/S/IPClCF/L.2, at 7
(1976) (Provisional Agenda Item 2 of the Second Preparatory Meeting for the Establishment of
a Common Fund, held at Geneva, Jan. 24,1977) [hereinafter cited as Common Fund Financial
Requirements).
70 Issues Relating to a Common Fund, supra note 62, at 6.
904
[Vol. 10:887-
HeinOnline -- 10 Law & Pol’y Int’l Bus. 904 1978
A COMMON FUND
(a)
Trade-ifJs
Simulation studies indicate that individual products within the
integrated group of commodities fluctuate at different rates and
during different time periods. Proceeds from sales of one commodity
stockpile therefore would be returned to the Fund and then re-lent for
buying other stocks. Group B has maintained that UNCTAD underestimated acquisition costs and overestimated offsetting price
movements. 71 The UNCTAD study admitted that the offsetting effects might be overestimated especially if commodity price movements became more synchronized,72 which in fact happened in 1974
and 1975. 73
(b) Maximum Stock Holdings
The figures are based on the estimated maximum size of stock
necessary to achieve the goal of maintaining the price of each commodity within the range of plus or minus 10 percent around the
stated target price over the period 1979-1987. Since less than the
maximum will be required for all ten core commodity stocks at any
one time, actual average stocks held would probably cost only $3
billion.
The estimates are subject to decisions made by each ICA as to stock
size and price floors and ceilings. These decisions will affect the
financial requirements of the Fund but will remain essentially outside
the Fund's control. Indirect protection of Fund resources could be
attained by limiting the size or duration of stocking that the Fund
would finance for anyone ICA.
3. Non-stocking Operations
Consensus has not been reached on the question of whether the
Common Fund should support such non-stocking operations as diversification projects, research and development, or market promotion. 74 Fund financing for any such operations could be done in
11. UNCTAD, Report of the First Preparatory Meeting for the Negotiation of a Common
Fund, held at Geneva, Nov. 29-Dec. 4, 1976, U.N. Doc. TD/B/IPClCF/4, at II (Dec. 22, 1976)
[hereinafter cited as Report of the First Preparatory Meeting].
72 Common Fund Financial Requirements, supra note 69, at II.
73 [d.
H See VNCT AD, Common Fund: Financing of Operations Other than Stocking, V.N. Doc.
TD/B/IPClCF/L.3 (Dec. 29, 1976) (Provisional Agenda Item 2 of the Second Preparatory
Meeting for the Establishment of a Common Fund, held at Geneva, Jan. 24, 1977). The socialist
states have ex.pressed concern about these other operations as they might create a "conflict of
905
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 905 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
cooperation with other multilateral lending institutions, such as the
World Bank, or through a second "window" of the Fund. Since loans
for non-stocking purposes would probably need to be long-term,
whereas loans for stocking would use revolving credits, a second
window would lend on different terms. This second account would be
financed in part by special grants from member countries. 75 Additional funds would come from transfers of net income accruing to the
Fund's ordinary capital, much as the World Bank transfers net income to its third window, the International Development Agency.76
The Secretariat recommends an initial lending limit of $500 million
for non-stocking operations during the first three years of operation
of the Fund.
4. Storage Costs
The cost of storage-warehouse rent, insurance, turning charges
for replacing and selling older stocks and interest charges on the
purchase price-is critical in determining the length of the stocking
cycle and the margin between the buying and selling prices. No other
technical aspect of the UN CTAD proposals has been subject to as
great a dispute as this. ICAs must sell their stocks at a price which
covers total costs in order to fully repay the Common Fund. If
average annual storage costs are 5 percent and interest charges on the
purchase price are 10 percent, then a 15 percent increase would be
required after one year merely to cover these two costs, exclusive ot
additional insurance and administrative expenses.
A further difficulty is that storage costs will vary with the grade and
quantity of the commodity. 77 Commodities such as bananas cannot be
stored at all while other commodities are subject to varying degrees of
perishability and additional technical considerations. For example,
cocoa, unlike coffee, cannot be easily stored in the region where it is
produced since the quality of cocoa quickly deteriorates in the hot and
priorities" within the Common Fund. See Report of the Second Preparatory Meeting, supra note
38, at 9.
15 See generally VNCT AD, Common Fund: Mode of Operations, V.N. Doc. TD/B/IPClCFI
L.5, at 7 Oan. 19, 1977) (Provisional Agenda Item 2 of the Second Preparatory Meeting for the
Negotiation of a Common Fund, held at Geneva, Jan. 24, 1977) [hereinafter cited as Common
Fund: Mode of Operations).
16 Both IMF/IBRD and VNCTAD have prepared studies: see IMF/IBRD JOINT STAFF
STUDY, note 11 supra; VNCTAD, Commodity Problems and Policies: The Development of an
International Commodity Policy, V.N. Doc. TD/8/Supp. 1, at 52-56 (1967).
17 International Commodity Stocks, supra note 58, at II.
906
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 906 1978
A COMMON FUND
humid climates in which it is grown. Copper, on the other hand, can
be placed in open air bulk storage in the producing state.
The estimated annual storage cost for copper ranges from 0.5
percent to 0.8 percent of the average price per ton of copper, whereas
the estimated storage cost for bauxite ranges from 6.8 percent to 13.1
percent. 78 These estimates are based on warehousing in London or
Rotterdam. 79 Admittedly, they do not reflect lower costs of storage if
commodities were kept in the developing countries where they are
produced. 80 Nor do these figures include the enormous turning
charges for handling the replacement of perishable stocks to avoid
deterioration. Unfortunately, no one knows for sure what average
annual storage charges will be. These charges will be borne by ICAs
but if they are too high the viability of the Common Fund will be
undermined.
5. Supply Controls
Excessive accumulation of stock, indicative of a floor price that is set
too high, could place a tremendous demand on the credit resources of
the Fund. It is therefore important that the Fund agreement stipulate
that each ICA must provide for periodic re-examination of price
levels to qualify for Fund lending.
Since such decisions take time, in the interim ICAs should be
required to have stand-by authority (controlled by the buffer stock
managers rather than a political council) to impose export quotas on a
predetermined pro rata share of export sales. For commodities with
long declining price trends the Fund should condition further financing upon approval of a diversification plan as well as export quotas.
6. Additional Factors
A number of additional variables can affect the capital requirements of the Fund: (a) the intervention price; (b) the margin between
floor and ceiling prices; (c) the degree to which export or production
quotas are used, thereby reducing the financial requirements for
stocking operations; (d) the magnitude of demand and supply responses to changes in price; and (e) the level of national stocks, since if
these are lowered or transferred to new ICAs then a perceived need
78
79
80
Id. These figures use 1974 as the base year.
Id.
Id.
1978]
907
HeinOnline -- 10 Law & Pol’y Int’l Bus. 907 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
for higher reserves (strategic or otherwise) may increase the cost of
international stocks.
Of these technical considerations the first three are within the
control of ICAs but the last two, as well as other unstated factors, are
controlled by market forces. None appear to be controllable by die
Common Fund except indirectly through conditions attached to ICA
lending. Certain other considerations, such as the length of time a
particular commodity should be supported in a declining market, are
matters of policy. The capital requirements of the Fund are thus
subject to a wide number of technical and political variables, and as
UNCTAD has reported, "no broad consensus exists at this stage on
the amount of money, if any, which may be required to help stabilize
the trade of one of these commodities-let alone the total."81
FINANCIAL VIABILITY
In principle, commodity organizations should be able to make
profits on either a rising or falling market, but in practice it is
easier to make profits on an upward swing, with sales taking place
at price levels higher than the cost of acquisition.
Gross profits must cover the cost of the storage and interest
charges outlined above, thus the aim is to ensure that large stocks
are not held for long periods. Holding periods are largely determined by the length of price cycles: "the more frequent the successive price peaks, i.e., the shorter the cycle, the greater the opportunity of selling the stock at a profit."82 An UNCTAD study of the
original list of 13 commodities shows an average price cycle of 22
months with stocks being held for an average of 18 months. 83 In
some cases a few core commodities would be held for significantly
longer maximum periods, e.g., sugar and rubber for about 2 years,
and coffee 84 for almost 4 years. 85 This UNCTAD study concludes
Report of the Second Preparatory Meeting, supra note 38, at 2.
UNCTAD, A Common Fund for the Financinl/: of Commodity Stocks: Amounts, Terms
and Prospective Sources of Finance, U.N. Docs. TD/B/C.I1184 and Corr.l, at 10 (July 3,
1975) (Agenda Item 5 of Report of Comm. on Commodities, Trade & Dev. Bd., for the 8th
sess., pt. 2, held at Geneva, July 21, 1975) [hereinafter cited as Amounts, Terms and
Prospective Sources of Finance).
83 Id.
8. Coffee, being atypical. requires additional non-stocking measures.ld. at 12.
8. Id. The figures in the text refer to the downswing holding period (the half-cycle). The
maximum complete price cycle estimates are 26 months for sugar, 42 months for rubber and 79
months for coffee.
81
8'
908
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 908 1978
A COMMON FUND
that if a commodity must be held for 3 years at a storage cost of 4
percent per annum and 10 percent interest charge, then the accrued charges of 48 percent are not compatible with stabilization. 86
A market that would allow a price margin of 48 percent between
buying and selling prices is simply not stabilized. At the very least
some stocking operations will not be profitable and may entail
substantial losses.
Professor Behrman's economic analysis of projected Fund operations indicates that financial viability may be hindered in a number
of ways.87 His studies show that for several products supply increases will occur in response to the initial price increases caused by
stocking, which will drive prices down after 6 or 7 years. The
market dynamics will also cause periods as long as 6 or 7 years on
average (in the case of eight core commodities) where particular
buffer stocks will neither buy nor sell. Thus, although the Havana
Charter88 recommends a 5 year duration for ICAs, a longer period
may be required to ensure their effectiveness. For the same reasons
a Fund agreement should also be for more than 5 years. 89
Behrman, whose estimates of minimum stock level requirements
for the core commodities are 75 percent higher than UNCTAD's,
further concludes that the suggested capital of $6 billion will be
insufficient. When adjustments are made for inflation since 1974 and
transaction costs, his estimates rise to nearly $1 0.5 billion for just eight
core commodities. 90 Although Common Fund financing will reduce
the total capital requirements as a result of offsetting price fluctuations, such reductions will be quite small. 91
It remains to be seen which commodities will be included in the
IPC; thus, the true costs and resources of the Fund cannot be accurately estimated as yet. There does appear to be a need to scale down
the Fund's scope and this is occurring in negotiations on individual
ICAs. While Behrman's studies are tentative and based on many
assumptions they do cast a cloud over the optimistic projections made
by UNCTAD.92
86
87
Id.
See J. BEHRMAN, note 40 supra.
88 U.S. DEP'T OF STATE, PuB. No. 3206, COMMERCIAL POLICY SERIES 114, HAVANA CHARTER
FOR AN INTERNATIONAL TRADE ORGANIZATION (1948) [hereinafter cited as HAVANA CHARTER].
89 See J. BEHRMAN, supra note 40, at 37.
90
Id.
91
/d. at 41.
92
Other studies based on one or two commodities have also cast doubt on UNCTAD's
909
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 909 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
In light of the principle enunciated by the Group of 77, and
accepted by the other groups, that the Fund shall function at a net
profit,93 the adverse effects outlined above might be minimized by the
establishment of legal rules governing operations of the Fund. Lending criteria could be established to limit the duration and size of a
commodity stock holding. If there were long adverse cycles, an individual commodity organization would have to look elsewhere to subsidize its loss-making operation. Subsidies from the Common Fund
would not be consistent with the Fund's profit requirements; ICAs
would therefore be required to look to other sources, including their
own members whenever the Fund's borrowing limits were reached.
SOURCES OF FINANCE
The Fund's capital structure depends in part on the proportion of
funds to be subscribed by its members and the proportion to be
borrowed. The choice of capital-to-borrowing ratio will significantly
affect the Fund's creditworthiness. The greater the ratio of subscribed (free of interest) capital to borrowed (interest paying) capital
the lower the costs of capital acquisition. This ratio will directly affect
lending rates charged to ICAs94 since the Fund's charges must reflect
its costs to ensure its financial viability.
The UNCTAD Secretariat has suggested a debt-equity ratio of2: 1.
The $6 billion capital requirement would thus be met by $1 billion of
paid-in capital subscriptions by member states, an additional $1 billion of capital on call, and $2 billion borrowed against each of these $1
billion subscriptions. 95
Other sources of finance may be considered as the Fund develops,
such as voluntary contributions, net profits from previous operations,
and charges for assuming obligations of members under sole purchase commitments. New profits should be tapped only after a reasonable reserve has been built up.
estimates. See, e.g., Smith & Schink, The International Tin Agreement: A Reassessment, 86 ECON. J.
715 (1976); Kreinin & Finger, supra note 57, at 505-06.
93 UNCT AD, Report of the Third Preparatory Meeting for the Negotiation of a Common
Fund, U.N. Doc. TD/B/IPClCF/8 Annex I, at 2 (March 3, 1977)(held at Geneva, Feb. 21-Mar. 1,
1977) [hereinafter cited as Report of the Third Preparatory Meeting] .
•• H. O'NEILL, supra note 9, at 29 .
• 5 Issues Relating to a Common Fund, supra note 62, at 6-7. See also E. ROTBERG, THE WORLD
BANK: A FINANCIAL APPRAISAL 10 (1976).
9lO
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 910 1978
A COMMON FUND
Capital Subscriptions
How are individual national shares of the $2 billion worth of capital
subscriptions to be determined? UNCTAD documentation suggests a
number of possible schemes, most of which classify participating
states on the basis of economic criteria. O'Neill describes three possible alternative structures:
(1) Tripartite Structure. A tripartite structure made up of (a)
OPEC countries which would subscribe 25 percent; (b) exporting countries which would subscribe 37Y2 percent; and
(c) importing countries which would subscribe 37Y2 percent.
(2) Equal Shares. A structure in which exporters and importers would have equal capital shares ..
(3) Exporter Majority. A structure made up of exporters
and importers with exporters having a majority (60 percent)
share. 96
Some problems as to OPEC contributions are apparent. O'Neill
assumes that OPEC countries are capable of paying a 25 percent
share. They have a combined current account surplus for 1974-76 of
approximately $140 billion. This is in contrast to the 7 prior years in
which the combined surplus totaled only about $15 billion. Despite
this surplus they have resisted financing a 25 percent share, pointing
out that they are largely net importers of commodities, accounting for
considerably less than 25 percent of commodity trade. Not all OPEC
members are rich in capita1. 97 Venezuela and Iran are both spending
more than they earn in their rush to industrialize and diversify their
economies. 98 Indonesia and Nigeria have severe economic problems
despite high oil incomes. 99 It is thus particularly significant that only
one member state of OPEC has pledged a definite contribution to the
Common Fund. OPEC members' reaction to increased IMF subscription calls have been largely negative and this fact does not augur well
on the chances for acceptance of such a large subscription to the
Comm·on Fund.
Determination of subscriptions on the basis of trade raises a num96
97
H. O'NEILL, supra note 9, at 30.
See Silk, The IMF and Debts of Poor Nations, N.Y. Times. Mar. 28. 1977. at 43. col. 4. Iran.
with capitaIsurpluses 0[$12.6 billion in 1974. was down to $2.6 billion in 1976; Nigeria dropped
from $5.0 to $1.3 billion.
98
99
See id.
Id.
911
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 911 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
ber of essential questions. On what basis is the determination to be
made as to whether a state is an "exporter" or "importer"? Is it to be
on a per commodity or on net total basis? Will the determination be
solely based on the eighteen commodities specified in the resolution
calling for an IPCloO or on the other commodities to be included in the
IPC? What weight will be given to trade in commodities-will it be
straight dollar value, or some relative term such as value to the
economy? What adjusment will be made for countries with inflated
trade figures due to their use as transshipment ports? Even if precise
criteria were agreed upon, the calculations are exceedingly complex
and subject to varying interpretations. How will benefits derived from
the IPC be measured? If trade shares are used, will tonnage, dollar
value, or potential stockpiling costs per ton be the unit of measure?
Any allocation based on trade shares will need to be modified
because it is widely accepted that "ability-to-pay" must be considered. lol Relevant factors which are easily measured are GNP and
size of international monetary reserves. Obviously a more sophisticated system of weighing together the various factors would be
needed, but this obstacle has been overcome in other international
financial institutions such as the African and Asian Development
Banks. lo2
The total paid-in capital of $2 billion from member states might be
apportioned as follows: $600 million on the basis of trade share;
$600 million on the basis of GNP; and $800 million on the basis of
GNP per capita. 103 Further adjustment to these calculations must
be made for payments in non-convertible currencies by some of the
least developed countries, and for a minimum contribution of an
equal amount by all states.
The Group of 77 suggests that a minimum subscription be paid
by all states as a symbol of their support. An additional quota
would be established for each state, based on criteria yet to be
designated, but exemptions in whole or in part would be granted to
some of the least developed countries. 104 For example, since many
G.A. Res. 3201, note 5 supra.
101 UNCT AD, Common Fund: Capital Subscriptions, U.N. Doc. TD/B/IPCJCF/L.4, at 2 (Jan.
3, 1977) (Provisional Agenda Item 2 of the Second Preparatory Meeting for the Negotiation of a
Common Fund, held at Geneva, Jan. 24, 1977) [hereinafter cited as Common Fund: Capital
Subscriptions].
102Id. at 7, n.IO. For a summary of previous efforts in this area, see The Asian Development Bank and Trade Stabilization, U.N. Doc. ElCN.1I1707, at 71-82 (Oct. 15, 1970).
103 Common Fund: Capital Subscriptions, supra note 101, at 8.
104 Report of the First Preparatory Meeting, supra note7l, at 12.
100
912
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 912 1978
A COMMON FUND
developing nations have minimal earnings in convertible currencies, their subscriptions could be payable in their national, nonconvertible currencies. In view of the existing debt problems of some
of these states, such an exemption seems worthy of support. I05
Care must be taken, however, to keep to a minimum the number of
subscriptions made in nonconvertible currencies as the Fund will
be unable to borrow against this portion of its capital. The general
rule in a Fund agreement should therefore require subscription
payments in convertible currency with partial exemptions being
granted on a case by case basis.
Finally, measures to deal with allocation of current subscriptions
to existing ICAs should be considered. There are three options:
mandatory transfer, voluntary transfer or absolute retention of
ICA funds. The ICA secretariats generally prefer voluntary transfer of subscriptions to the Common Fund rather than mandatory
transfer, as do the countries with especially strong interests in a
particular commodity. It is doubtful, for example, that member
states of the International Tin Agreement would demonstrate enthusiasm for the merger of its accumulated capital and reserves
into a Common Fund to benefit other commodities and newer
member states. UNCT AD has suggested that voluntary transfers to
the Fund could be earmarked for the specific commodities for
which they were originally contributed.
There has never been any suggestion that existing ICAs would
be compelled to rely upon the Common Fund and relinquish their
self-financing mechanisms. Individual commodity organizations
would be free to remain outside the IPC, or to associate with the
Fund and retain an element of self-financing.
Borrowing--Factors and Costs
Sources for borrowing by the Common Fund include governments, their agencies, international organizations and private capital
markets. The Fund's ability to borrow depends on two major factors: its
perceived creditworthiness and its ability to offer guarantees. Borrowing from private markets, the largest source of funds, would be
backed in part by either callable capital or government guarantees.
The major private lending institutions would evaluate the credit ratings of governments which offer guarantees for loans to the Common
Fund .
• 0.
See Wall St.
J..
Mar. 10. 1977. at 1. col. 6.
913
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 913 1978
LAW &. Pouey IN INTERNATIONAL BUSINESS
At least one half of the Fund's borrowing ability will be affected
by factors beyond its control, such as the credit ratings of member
governments; other factors such as fiscal management and stocking
operations are within the Fund's control and affect its. creditworthiness directly.
Legal ownershi p 106 of stockpiles must be placed in the' hands of
commodity organizations, with the Fund having a lien on stocks for
which it has lent funds. These liens could be used as guarantees or
collateral for loans made to the Common Fund itself, in a manner
similar to that under article X(6) of the Tin Agreement where the
Council may borrow money upon the security of tin warrants held
in the buffer stock. 107 The use of stock as collateral in such a case
has a built-in conflict. Commodity organizations will often be acquiring stocks precisely because the market price is declining. Thus
the value of stocks held and their value as collateral will also be
declining. lOS The point is particularly significant because the compromise proposal offered by Group B at the November 1977
negotiating conference placed a heavy emphasis. on using stock
warrants as collatera1. 109 Where such collateral is used instead of
government capital subscriptions, it can be expected that lenders
will discount the value of warrants during a declining market as the
value of commodity stocks which they represent also declines.
The cost of borrowing is of critical importance to the financial
viability of the Common Fund. The Group B states suggest that if
member governments were to pay in $2 billion the interest rates on
their loans would range from 8 percent to 15 percent. IIO The lending
rates on the Eurodollar!! I market as of September 1978 were 8 percent
to 9 percent. 112 ,The World Bank has expressed a willingness to lend
but its rates as of January 1978 were 7.45 percent. 113 Group B argues
See generally Fawcett, The Function of Law In International Commodity Agreements, 44
157, 174 (1970).
107 See id. at 173.
108 See Report of the First Pr<:paratory Meeting, supra note 71, at 14.
109 See UNCT AD, Elements for the Basis of a Common Fund, Proposal Submitted by
Countries Members of Group B, U.N. Doc. TD/IPc/CF/CONF/L.5, at 3 (Nov. 7, 1977) (Agenda
Item 9 of the United Nations Negotiating ~onference on a Common Fund Under the Integrated Programme for Commodities, 2d sess., held at Geneva, Nov. 7, 1977) [hereinafter cited
as Elements for the Basis of a Common Fund].
110 See Report of the First Preparatory Meeting, supra note 71, at 11.
I I I Eurodollar is the term referring to the pool of U.S. dollars that is held outside the U.S. and
forms one of the world's most important sources of financing.
112 Money Rates, Wall St. j., Sept. 15, 1978, at 37, col. 2.
113 The 7.45 percent interest rate applied to loans for the third quarter of fiscal year 1978
106
BItIT. V.B. INT'L L.
914
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 914 1978
A COMMON FUND
that if the cost of borrowing were 8.5 percent, then on the basis of
UNCTAD's own figures,114 none of the commodity organizations
would earn a rate of return sufficient to repay loans financed at that
interest rate. lIS The Secretariat of UNCT AD points out that the
average cost of borrowing is a relevant factor in assuring adequate
profitabilityY6 By way of illustration, if one third of the Fund's
resources were obtained from subscribed capital, another third on
concessional terms 117 and the remaining third at Eurodollar rates
then the Fund could re-Iend to commodity oJ;ganizations at as Iowa
rate as 4.5 percent and still produce an adequate net incomeYs
Since the earliest proposal for an IPC, most parties assumed that
OPEC states would be a major source of borrowed funds. It was
probably reasonable to assume that OPEC reserves, now placed in
short-term deposits,119 would be attracted to a profitable and tax
exempt international fund. After all, OPEC states had lent $2.2
billion to the World Bank,120 and their surpluses have recently been
estimated at $42-46 billion. 121 Wasserman, a close observer of OPEC
and commodity trade, argues that OPEC states are very conservative
investors and that commodity stocks would be viewed as a poor
risk. 122 But despite the poor investment opportunity, the OPEC states
Uanuary through March). Under a formula for determining lending rates adopted by the
World Bank in May 1976, the Bank's lending rate is reviewed quarterly and is maintained at 0.5
percent above a specially calculated average cost of Bank borrowings during the preceding 12
months. FINANCE & DEV., March 1978, at 4.
114 UNCTAD, Common Fund Financial Requirements, supra note 69, at Table IV.
11. See Report of the Third Preparatory Meeting, supra note 93, at 10.
116 See id.
117 The source of this concessional funding is not defined but presumably would include
governments and the IDA.
118 Report of the Third Preparatory Meeting, supra note 93, at 10-11.
119 These deposits are also moved from currency to currency causing disruption to money
markets. See Janssen, Economic Shock Wave From Oil Price Rises In '73 Still Hurts West, Wall St. j.,
Mar. 10, 1977, at 1, col. 6.
120 See E. ROTBERG, supra note 95, at 5. Note that only seven members of OPEC participated
and that the Saudi Arabian Monetary Agency alone purchased one-half. Id. at 5-6. These
figures are as of December 31,1975. The UNCTAD figure for OPEC lending to the World
Bank for the period January 1973 through June 1975 is $2.438 billion. See also UNCTAD,
Elements of a Programme of Economic Cooperation Among Developing Countries, U. N. Doc.
TD/192/Supp. 1, at 55 n.58 (Mar. 26, 1976) (Provisional Agenda Item 14 of the UNCT AD 4th
sess., held at Nairobi, May 5, 1976).
121 Compare Silk, note 97 supra with Janssen, supra note 119, at 28, col. 3.
122 See Wasserman, Commodities: An Integrated Approach, 9 j. WORLD TRADE L. 584, 586
(1975). Wasserman reports the resentment of several developing country delegations over the
failure of OPEC countries to commit themselves to investment in commodities as expressed in
the Conference of Developing Countries on Raw Materials, Dakar (1975). A resolution calling
upon OPEC to make such a commitment was passed. More recently, resentment of OPEC's
1978]
915
HeinOnline -- 10 Law & Pol’y Int’l Bus. 915 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
might agree to substantial subscriptions to the Fund just as they have
given extensively for development projects that promise little return.
They might also weigh the political prestige gained by being perceived as the major contributors to this new institution that developing nations feel is so important.
Accurate predictions regarding economic viability of the Common
Fund can only be made once agreement is clear on which commodities will be included, which countries will subscribe, and what terms
will govern Fund operations. Some guidance, however, may be found
in the practices of other international financial organizations; the World
Bank, for example, has been able to borrow $14.6 billion on international money markets for relending at favorable rates. 123
Comparison with W orid Bank Borrowing and Operations
The World Bank enjoys the highest credit rating possible on world
financial markets. 124 1t has borrowed on all the world's leading money
markets in a variety of currencies through direct placement with
governments or central banks as well as through private investors.125 This success is linked to a deliberate program aimed at
making the Bank's obligations an acceptable and attractive investment to lenders throughout the world.
The World Bank's efforts first focused on establishing a sound
credit rating by borrowing from governments, central banks and
national lending agencies. It should be made clear that the World
Bank paid normal, non-concessionary interest rates. Only later did
, the Bank offer bonds on private markets providing interest yields
typical of other high grade tax-free bonds. At the present time 47
percent of World Bank debts are held by governments or central
failure was expressed at the U.N. General Assembly. Barbados' Minister of External Affairs
complained of the parsimonious attitude of the oil producing states who concentrated their aid
in a handful of mainly Islamic states. N.Y. Times, Oct. 17, 1977, at 3, col. J. However, all
indications are that OPEC member states are reluctant to make concessional contributions to
funds for Third World development. Recently, the Saudis (and other Arab members of OPEC)
demurred on major help to the new IMF supplementary facility. N.Y. Times, May 5, 1977, § D,
at 9, col. I. These countries have shown their conservative investment pattern by placing a large
share of surplus funds in short and medium-term portfolio investment. Norman, Saudis Plan
Big Near-Term Investments in U.S. Securities Over Next 2 or 3 Years, Wall St. j., May 5, 1977, at 16,
col. 2. This trend to short-term, highly liquid U.S. treasury notes and bonds has sharply
increased of late. N.Y. Times, Sept. 22, 1977, § D, at 2, col. 5.
123 See WORLD BANK, ANNUAL REPORT 1977, at 131 (1977).
124 See generally E. ROTBERG, supra note 95, at 8.
125 Id. at 3-10.
916
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 916 1978
A COMMON FUND
banks. 126 The balance of its financing comes from private investors.
The Bank's sound credit rating is now based upon its extraordinary
30-year loss-free loan record. Few if any banks can boast of a
similar 30 year period without a default.
The Bank's reputation is further enhanced by its liquidity policy,127
its wide mix of obligations (variety of interest rates and maturities)
and a policy of limiting its loans so as to never exceed its capital and
reserves. The Bank's overall conservative fiscal policy is supported by
member states because it is in their own best interest. It ensures that
the unpaid capital subscription (which is 90 percent of the total) need
never be called. The Bank's approach is to operate as if the guarantee
of callable capital did not exist. There is no reason why a Common
Fund could not pursue similar policies and even embody them in the
guiding principles of the treaty or convention that establishes the
Fund.
Perhaps the most important reason for the Bank's success as a
borrower is that its debt-equity ratio is a low 2.65: 1, considering only
paid-in capital, reserves and net income as equity.128 If the additional
$28 billion of uncalled capital is considered, the ratio falls to 1 :2.4.12 9
Under the proposed phase-in of the Common Fund $2 billion would
be borrowed against the first $1 billion of paid-in capital so that,
initially at least, its debt-equity ratio of 2: 1 would exceed the Bank's
2.65: 1. If a further $2 billion is borrowed against the $1 billion
uncalled capital, the ratio remains at 2: 1 but compares unfavorably to
the 1:2.4 debt-equity ratio of the World Bank when uncalled capital is
considered. Yet it should be recalled that either ratio is considerably
lower than that of comparable commercial institutions.
It remains to be seen whether the Common Fund's creditworthiness will be perceived as equivalent to the World Bank's, thus
enabling the Fund to borrow on the most favorable terms available. It
[d. at 9.
The bank borrows substantially more funds than needed for current disbursements, the
advantage being protection against higher levels of interest rates or maturities which may
prevail when the cash requirements fall due. The treasurer of the bank, Mr. Rotberg, states,
I would suggest that there are few, if any, banks which have liquid resources equal to
twice their public debt falling due in the next five years. This is the kind of flexibility
which provides us with ORtions, should capital markets deteriorate in quality or
quantity. We seek to avoio the position that is faced often by many commercial
institutions where tight money policy, deteriorating capital markets, and concentration on too few sources of funds, severely reduce profitability and flexibility.
[d.
128 [d. at 13.
129 [d.
126
127
917
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 917 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
is encouraging to observe the success that newer development lending institutions have had. The Inter-American Development Bank,
African Development Bank and Asian Development Bank have followed the World Bank pattern of building up a good credit rating on
the foundation of a well-balanced legal charter and sound banking
practice. There is every reason to believe that the Fund would be
established and operated in a similar fashion.
STRUCTURAL COMPONENTS OF A COMMON FUND
Participation
As indicated above, the number of states participating in the Fund
will directly affect the size of individual subscriptions and indirectly
affect the financial viability of the Fund's operations. The membership of most major industrial powers is essential, not only for their
large capital subscriptions but, more importantly, for their political
and financial backing. Private investors will more likely buy Common
Fund bond issues if the governments that guarantee them have
strong financial reputations. Such guarantees may be express, in the
case of a particular issue, or implied, as in the case of uncalled capital
subscriptions.
The Fund's financial viability is also linked to the success of individual commodity organizations. The Fund must have customers and
most of the commodities proposed for inclusion in the IPC are not at
present covered by any international agreement.
As a final consideration it seems unlikely that any state's refusal to
participate in the capital subscription can effectively undermine the
formation of the Fund. Trade in each commodity is so diversified that
no one state exercises significant control over trade in the integrated
group of commodities.
Structure
1. Why Another Multilateral Institution?
At issue in negotiations over the Common Fund is whether it
should be an independent multilateral institution or be formed as an
agency of a larger existing institution. The Secretariat of UNCT AD
appears to have assumed that the Common Fund would be established as an independent organization. This is the preference of the
918
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 918 1978
A COMMON FUND
Group of 77,130 but they may be willing to establish the Common
Fund as an agency of UNCT AD. While political considerations may
be determinative of the ultimate decision, non-political considerations-practical, economic, and structural criteria-point
to creating the Common Fund as a semi-autonomous agency under
the uml;>rella of either the International Monetary Fund (IMF) or the
International Bank for Reconstruction and Development (IBRDWorld Bank). These agencies, either separately or jointly, have existing staffs, experience, information gathering facilities, and powers of
coordination in development assistance matters which the new
Common Fund would need to acquire. Supplemented by additional
staff and financing there is every reason to expect that the Common
Fund could quickly step into its role as an international economic
institution by using the experienced personnel and procedures existing within the IMF-IBRD. The most important consideration,
though, is the additional financial strength and respectability which
the Common Fund would have if it were part of the IMF-IBRD
umbrella.
The additional problem of proliferation of international economic
organizations should be considered. Many have suggested that the
overlap and confusion among present multilateral institutions, combined with the host of new national agencies for development aid,
indicates the need for a moratorium on new international institutions. This feeling has been strongly expressed by a number of governments and the Congress of the United States. Henry Costanzo has
recommended:
I do think it is important to distinguish between, on the one
hand, the elaboration of new international tasks and func- .
tions in response to emerging situations and, on the other
hand, the creation of new, independent international bodies
to carry them out. Given the broad array of existing institutions, in most cases it would seem more appropriate to pour
new wine into the serviceable bottles we have, rather than
invest in new bottle-making machinery whose output remains to be tested. Where more is required than simply
assigning a new responsibility to an ongoing operation,
. adaptation, even ifby major surgery, seems preferable to the
creation of entirely new poles or centers of organizational
130
See Report of the First Preparatory Meeting. supra note 71. at II.
919
1978J
HeinOnline -- 10 Law & Pol’y Int’l Bus. 919 1978
LAW & POUCY IN INTERNATIONAL BUSINESS
activity unrelated to wh~t already exists .... Our emphasis
now should be on integration, not expansion}3l
Existing multilateral institutions have some proven advantages.
They are able to insist upon stringent lending conditions and upon
sound planning of projects. l32 Nations are already experienced in
dealings with these institutions. As the ultimate aim of the IPC is
economic development, it is important to consider the role these
institutions already play in coordinating international development
assistance. Both the IMF and World Bank have proven their financial
strength and their ability to expand their financial resources through
borrowing on private money markets. They have, for example, attracted OPEC funds and have thereby mobilized resources for development far greater than the sum of direct contributions to them by
donor governments. l33
It has been argued that making the Common Fund a part of the
IMF-IBRD would be unacceptable to the Group of 77, primarily
because of their resentment of the terms and conditions of lending
offered by these institutions. Although the IMF and IBRD operate
according to stringent banking terms, these two institutions have
shown flexibility in their response to the demands of deVeloping
countries. Years ago the IBRD established the International Development Agency (IDA) and the International Finance Corporation
(lFC) to better meet the needs for more concessional financing with
less stringent conditions. 134 It is envisioned that the IMF may finance
the compensatory financing mechanism of the IPC.l3S The IMF is
carrying out a study, at UNCTAD request, on possible expansion and
further liberalization of the existing compensation scheme. l36
131 Constanzo, Opming Remarks, in THE FUTURE OF INTERNATIONAL ECONOMIC ORGANIZATIONS 4, 7 (D. Wallace & H. Escobar eds. 1977).
132 See Foreign Assistance and Related Agmcies Appropriations for 1978: Hearings Before the
Subcomm. on Foreign OPerations and Related Agencies of the House Comm. on Appropriations, 95th
Cong., 1st Sess. 584 (1977) (statement of Cyrus R. Vance).
133 [d.
134 See WORLD BANK, QUESTIONS AND ANSWERS 55 (1976).
135 Compensatory financing is the element of the IPC which aims to stabilize export income
from commodity sales. Where a nation's commodity export income falls below a certain
minimum level, e.g., 7 percent, then it is proposed that the IMF lend the nations a compensatory
amount repayable or possibly convertible into a grant. For further information on systems
existing in the IMF and European Economic Community, see Goreux, The Use of Compensatory
Financing, FINANCE & DEV., September 1977, at 20, 21.
136 See Issues Relating to a Common Fund, supra note 62, at 4.
920
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 920 1978
A COMMON FUND
2. Suggested Management Structure
Whether formed independently or as part of a larger multilateral
organization, the Fund will essentially be an international financial
institution. It would seem expedient to draw upon the experience of
management structure in similar existing institutions. In such institutions the division of authority is based on three levels: 137 a Board
of Governors, granted full powers under the articles of agreement
and comprising representatives from all member states; an Executive
Board, a standing body of limited membership which is delegated
powers by the Board of Governors to approve each financial transaction and to establish operational policies; and an Executive Head,
elected by the remaining smaller states. No small group of states in the
executive officer in charge of the professional staff. In the IMF and
World Bank the five states with the largest capital subscriptions each
have a right to appoint an Executive Director; the other Directors are
elected by the remaining smaller states. No small group of states in the
Common Fund is likely to have any large percentage of financial
responsibility138 and the trend in international organizations is to
favor the principle of equality of states. Thus, the developing countries probably will favor election, rather than appointment, of Executive Directors.
As part of a compromise formula, developed states may agree to
direct capital subscriptions to the Fund in return for a Group of 77
agreement that the Fund be established as a semi-autonomous agency
of the World Bank or IMF. In that event the Common Fund could
have a separate governing body but with membership contingent on
World Bank or IMF membership. Voting rights could be related to
importing and exporting of an agreed list of commodities. Such a
voting formula would give control to the largest trading states and
would thus be indirectly linked to financial contributions. In no event
would anyone state be paying more than 20 percent ofthe capital, as
does the United States in the World Bank. Thus, no one state or small
group of states would have any right to demand controlling influence.
In terms of management, the Fund could maintain a small professional staff of its own, similar to the IFC within the World Bank
group. It would work closely with and draw upon the Bank's research
Amounts, Terms and Prospective Sources of Finance, supra note 82, at 19.
This could change if OPEC states agreed to provide one-third of the capital subscriptions. These nations might demand a higher degree of control. Legal safeguards could be
included redressing any imbalance caused by a financially weighted voting system giving OPEC
countries significant authority ..
131
138
921
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 921 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
projects and economic analysis capabilities. Since the number of
borrowers from the Fund will be small, there seems to be no reason
for a large administrative staff. Except for the tasks of financial
decisions, research, and verification of the quantity and quality of the
stocks financed by the Fund's resources, the Fund may be able to rely
on the technical advice and support of the World Bank, IMF and
commodity organizations. 139
Decision-Making
Decision-making structure and voting control issues are fundamental to the successful conclusion of an agreement on the Fund and
its effective operation. Consumer and producing states alike are
concerned about protecting their interests against abuses of
decision-making power and maximizing their group's control. Methods should be adopted to protect against unacceptable policies. Wellframed rules on decision-making can enhance prospects for membership by a large number of nations. The following discussion on
decision-making takes into consideration the apportionment of voting strength, the principles upon which voting strength is determined, potential abuses of the procedure and the types of voting
procedures available. 140
1. Distribution of Voting Power
The distribution of voting power in existing international financial
institutions is based generally on the dual principles of equality and
proportionality in the allocation of votes. Each country initially receives an equal number of votes, then additional votes are assigned in
proportion to the share of capital stock held by each state.
Three major issues arise concerning the distribution of voting
power. The first issue raises the question of equality in voting
strength. Are votes to be assigned to each country regardless of the
group membership, or are certain groups to be favored through a
group approach to weighted voting? The second issue relates to the
methods to be used in assigning voting power. Once the ba&ic ap139
See Amounts, Terms and Prospective Sources of Finance, supra note 82, at 24.
For a full discussion of decision-making alternatives, see UNCTAD, Common Fund:
Decision Making and Management, U.N. Doc. TD/S/IPC!CF/L.6 Gan. II, 1977) (Provisional
Agenda Item 2 of the Second Preparatory Meeting for the Negotiation of a Common Fund,
held at Geneva, Jan. 24, 1977) [hereinafter cited as Common Fund Decision Making and
Management]. See generally C. RICHES, MAJORITY RULE IN INTERNATIONAL ORGANIZATIONS
140
(1940).
922
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 922 1978
A COMMON FUND
proach is agreed on, what criteria will be used to determine an
individual nation's voting rights? For example, what weight is to be
given to trade dependence or population? In determining traderelated criteria a decision must be made as to whether the ten core
commodities, the full eighteen, or some larger list will be used. Finally, the third issue is whether effective safeguards can be established to prevent the abuse of authority or voting control.
(a) Principle of Equality
The principle of equality, if applied alone, would suggest one vote
for each member state. A major criticism of such an apportionment is
that "[e]quality of voting power for all Members is a poor basis for
decision-making unless ... supported by ... a parity of interest."141
International organizations seldom have such parity, since member
states generally have different levels of interest in the various aspects
of the program. Thus, strict adherence to a principle of equality may
handicap some states in the decision-making process. The voting
leverage of anyone state may bear an impact far out of proportion to
the interests it has at stake. To strike a more equitable balance, many
international organizations use either a system of weighted voting or
a modification on majority voting procedures. 142
(b) Weighted Voting System
A weighted voting system can check the potential abuses arising
under a system relying solely on the principle of equality. The central
issue would be determining the criteria by which the extra weight
should be given. 143 There are two broad approaches to this question.
The first approach assigns votes to individual countries using specific
criteria such as degree of dependence on commodity trade, gross
national product or population. The second approach assigns votes
by groups of countries.
The first approach is widely used and rests on the two principles of
equality and proportionality. Each country would receive a minimum
number of votes to which additional votes would be added in proportion to its relation to the set criterion. 144 Proportion would vary as to
141
II H.
14'
See id. at 357.
Id. at 331.
See, e.g., Common Fund Decision Making and Management, supra note 140, at 1-2 (the
143
144
SCHERMERS, INTERNATIONAL INSTITUTIONAL
LAw 330 (1972).
UNCT AD Secretariat proposal based proportionality on capital stock rather than the criteria
suggested here).
923
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 923 1978
LAW & POLICY IN INTERNATIONAL BUSINESS
how a particular international organization allocates votes based on
the equality principles and votes based on proportionality. For example, the World Bank apportions 11 percent of the votes on the
principle of equality and 89 percent on the principle of proportionality. The African Development Bank, on the other hand, uses a ratio of
49 percent to 51 percent. 145 One commentator has suggested that
"given the basic objective of the IPC ... it would seem appropriate
that the proportion of 'equality votes' in the total should be as high as
possible."146 However, it is also noted that since "the common fund is
conceived as a financial institution . . . [the] members paying in
subscription capital might expect that their relative contributions be
recognized ... in the assignment of votes."147
The second broad approach to the weighting of votes would assign
votes to groups of countries. 148 A block of votes is usually allocated to
a group for them to distribute within the group as they see fit. Several
ICAs, including the International Coffee Counci1,l49 the International Tin Council, 150 and the International Sugar Council,151 allocate votes to both importing and exporting members who then apportion the votes among themselves.
If a group approach is adopted a number of technical difficulties
arise. Most states are both exporters and importers of a variety of
commodities and cannot be classified purely as either an "exporter"
or "importer." A state's status would vary with the changes in trade
relations. The Secretariat of UNCT AD suggests capital subscription
criteria be used instead of such variable trade-related criteria. 152
Group-weighted voting based on export/import standing may be a
more appropriate voting system at the level of individual commodity
agreements, where exporting and importing countries can be more
clearly distinguished. The Common Fund, on the other hand, should
[d. at 2.
[d.
147 [d.
148 For a discussion of this approach, see II H. SCHERMERS, supra note 141, at 333-34.
14. See International Coffee Agreement, 1968, openedfor signature Mar. 18, 1968, an. 12, 19
V.S.T. 6333, T.I.A.S. No. 6584, 647 V.N.T.S. 3.
150 See International Tin Agreement, note 13 supra, art. II(a).
151 See International Sugar Agreement, note 13 supra, art. 9. See also II H. SCHERMERS,
supra note 141, at 333-34.
152 See generally Common Fund Decision Making and Management, supra note 140, at 14-18.
It should be recalled that capital subscription also relates back to a determination of net terms of
trade in each of the ten core commodities, and hence to each state's total export and impon
trade.
145
146
924
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 924 1978
A COMMON FUND
reflect "a more global view of the whole range of world commodity
interests."153
Weighted voting systems have become commonplace in most international economic agreements. The reason for this wide-spread
acceptance is generally that most nations acknowledge the justice of a
system that allocates voting influence on the basis of relative investment. I54 But while the system rewards concrete commitments of
resources with enhanced voting power, it protects those members
with the smallest commitment by setting out a tight framework of
rights and obligations. Furthermore, the agreements are either
short-term or permit easy withdrawal, thus mmlmlzmg potential
harm to the interests of small countries. I55
2. Voting Procedures
There are mainly three types of voting procedures: unanimity,
majority vote and consensus. I56
The requirement for unanimity works best only in small, wellintegrated organizations. I57 It serves to protect the status quo and
discourage change. Organizations requiring quick decisions on controversial issues would be hindered by this procedure.
The majority vote procedure is used by most international organizations. In practice it can take on any number of different styles, but
four common examples of majority vote procedure are the simple
majority, qualified majority, relative majority and absolute majority.IS8 Such majorities "may be calculated from the total membership,
from ... [m]embers present, or from ... [m]embers expressly taking
part in the voting."159 The choice from among these majority vote
options depends on the situation at hand, and is usually a function of
the type of issue before the body.I60 Any of these procedures may be
applied in carrying out a system based on such principles as equality
Id. at 5.
Metzger. Settlement of International Disputes by NonJudicial Methods, 48 AM. J. INT'L L. 408,
416-17 (1954).
155 Id.
156 See II H. SCHERMERS, supra note 141, at 327-28,358,361-62 (1972).
157 Cf id. at 328 (Schermers says unanimity is more common in smaller, but more powerful
organizations).
158 Id. at 337-38.
159 Id. at 339.
160 For examples ofthe kinds of issues that might require qualified majorities or unanimity,
see Common Fund Decision Making and Management, supra note 140, at 6 nn.12 & 13.
153
154
925
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 925 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
of voting power, proportionality of voting power or upon a category
such as "trade dependence."
Of the four procedures mentioned above, the qualified majority
holds the most promise for the Common Fund. The qualified majority procedure may require a certain percentage of votes which is
two-thirds greater than a simple majority (e.g., a two-thirds majority)
or it may require the majority to include some specified category of
members. Under a qualified voting system a majority of votes would
not necessarily represent a majority of members. .
The Common Fund could use a qualified majority system which
wquld apportion a specific number of votes between exporting and
importing members. Approval could be conditioned on obtaining a
certain percentage from each block of votes, an approach used by
several lCAs.
The third voting category, decision-making by consensus is becoming more popular among international organizations as they have
begun to realize that "international cooperation is not served by
out-voting minorities."161 From a political rather than a legal viewpoint, cooperation may be developed better through compromises to
which all participants can adhere. A consensus system may be provided for by a provision allowing the chairman to determine the
"sense" of the meeting without a formal vote. The World Bank and
the lMF have both used this approach. 162
In general, the choice of voting procedure for the Common
Fund will depend on the particular parameters of decision-making.
Obviously not all decisions made by the Fund will be of equal importance. Simpler methods of voting can thus be adopted on procedural
issues or substantive issues of minor importance. In negotiations on
the Fund, an acceptable tradeoff for industrialized nations might be
to resort to weighted or qualified voting procedures only for decisions
involving crucial issues such as setting qualifying standards for financing of ICAs or establishing maximum drawings for anyone lCA. This
standard seems to underlie Article 63(b) of the Havana Charter, the
nonbinding but accepted agreement on guidelines for lCAs, which
speaks of special voting arrangements "in decisions on substantive
matters."163 UNCTAD apparently accepts this principle and requires
II H. ScHERMERS, supra note 141, at 328.
Common Fund Decision Making and Management, supra note 140, at 6.
163 The Havana Charter of the International Trade Organization, never fully ratified,
incorporated in Chapter VI a set of guiding principles for the establishment of ICAs. See
161
162
926
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 926 1978
A COMMON FUND
a qualified majority vote in the case of an exceptional decision for the
Fund itself to directly intervene in market operations. 164
3. Delegated Authority
A Fund agreement should provide for the division of decisionmaking authority among the general membership, an executive
council and the Secretary-General. The Fund can draw on the experiences of ICAs in which the general membership council exercises
all powers except those it delegates. The 1975 International Cocoa
Agreement, for example, prohibits Council delegation of a number
of important powers, such as the redistribution of votes, approval of
the administrative budget and assessment of contributions, revision
of the minimum and maximum prices and determination of annual
export quotas. 165 It also precludes delegation in areas of accession,
exclusion, or suspension of members, as well as termination or
amendment of the Agreement itself. Obviously this is an ICA where
all the most important powers are retained by the membership at
large. Contrast this with the 1973 Sugar Agreement in which the
only nondelegable powers are relocation of the headquarters,
budget approval, contribution assessment, dispute settlement and
membership sanctions. 166
4. Conclusion
Both the delegation of powers and the voting process must be
given special consideration in the negotiation of the Fund. The
negotiations must determine, for example, whether the C;ounci.l
or Executive Committee should be empowered to decide what
proportion of Fund resources are to be committed iri any financial
year as loans for purposes other than stocking. It must also be
determined whether special voting procedures, such as a weighted
two-thirds majority, should be required. It would.be helpful if the
Agreement, in addressing the various powers of the organization,
HAVANA CHARTER, supra note 88, ch. VI. See also C. WILCOX, A CHARTER FOR WORLD TRADE,
53-62 (1949).
184 See UNCT AD, A Common Fund for the Financing of Commodity Stocks: Suitability for
Stocking of Individual Commodities, Country Contributions and Burden Sharing, and Some
Operating Principles, U.N. Doc. TD/B/C.I1196, at 24 (1975) (Agenda Item 5 of Report of
Comm. on Commodities, Trade & Dev. Bd., for the 8th sess., pt. 3, held at Geneva, Dec. 8, 1975)
[hereinafter cited as A Common Fund].
,.5 International Cocoa Agreement, supra note 13, art. 17(3).
, •• International Sugar Agreement, 1973,openedforsignatureOct. 13,19 73,art.16(1), U.N.
Doc. TD/SUGAR.8/6 (1974).
927
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 927 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
set forth several voting procedures, stipulating which was to be
used in conjunction with the different decision-making powers it
grants.
The voting procedure that is adopted will have to put at rest the
fears of industrialized states that control will lie in "the tyranny of the
majority" and that the funds will be dissipated quickly. Members
paying in capital will resist any approach that fails to give them
voting power in proportion to their relative contributions. 167 Whatever decision-making structure and voting procedures are finally
adopted, they undoubtedly will be 'subject to criticism. But such
criticism would be applied equally to any proposal calling for a
restructuring of world trade in commodities. 16s
OPERATIONAL COMPONENTS OF A COMMON FUND
Fund Management
The staff and policy-making bodies of individual commodity organizations, and not the Common Fund, will determine stock sizes,
intervention prices and storage requirements. The primary role of
the Fund is to finance stocking arrangements of these organizations. It is essential, though, that the Fund follow the sound banking practice of domestic banks and establish guidelines and general
standards for its lending operations.
1. Lending Policies
Different lending rates and criteria may need to be established
for financing buffer stocks and non-stocking operations. Two different accounts, each with its own resources and operated se'parately, should be established for these two different financing activities. This approach will protect the credit standing of the Fund's
main operations as well as facilitate long-term financing which is
needed only in regard to non-stocking operations. In either case
the Fund must charge an adequate lending rate, the aim being to
set a rate as low as is compatible with its ability to borrow at
reasonable costs. 169
167 See generaUy Common Fund Decision Making and Management, supra note 140, at 2;
Repon of the First Preparatory Meeting, supra note 71, at 15.
168 See H. O'NEILL, supra note 9, at 34.
169 Common Fund: Mode of Operations, supra note 75, at 7,
[Vol. 10:887
928
HeinOnline -- 10 Law & Pol’y Int’l Bus. 928 1978
A COMMON FUND
The average cost of borrowing, the administrative costs, and the
liquidity requirements are all relevant to the establishment of the
Fund's lending rate. Another concern would be the desire to generate net income from lending to stockpiling operations· which
could be transferred to the second window account and used for
projects such as product diversification. In the early stages of the
Fund's operation the true costs of borrowing will not yet be established. This will make it difficult to set a lending rate. At the outset
the Fund could set a conservatively high rate to ensure its own
viability, but such high rates might overburden its few customers,
the commodity organizations.
The terms 'of loans might well require, as do World Bank loans,
that repayments be in the same currency as received so as to reduce
the risk of devaluation, a risk assumed by the Fund. Additional
.limits might be set as to the size of individual commodity drawing
rights under revolving credits. This would preserve some degree of
automatic lending, which is necessary if commodity organizations
are to take swift and effective market intervention, while still maintaining the financial controls required for sound management. 170
Whether or not an overall limit should be placed on lending to any
one commodity organization is debatable. 171 A known limitation
might encourage speculation against commodities, e.g., unloading
of excess stock with the knowledge that the Fund will cover the cost
of purchase.
It is difficult to foresee governments committing resources to the
Fund if no limits are set on the amount of funds anyone organization can borrow. Possible compromises include the establishment of
proportional limits, or provision for review of commodity price
targets and stock sizes, before granting loans over specified levels.
The Asian Development Bank Agreement includes a useful provision which, in the context of the Common Fund, would require the
Fund management to pay due regard to a policy that a disproportionate amount of its resources would not be used for the benefit of
any particular commodity agreement. Thus the Fund's management would have the flexibility to respond on an ad hoc basis to
market speculation. 172
170 Norway has suggested that a high degree of "automatic routine in the granting of loans
from the fund would be desirable." Proposals by Governments, supra note 61, at 4 (emphasis
added).
171 See H. O'NEILL, supra note 9, at 36.
172 UNCT AD, Economic Co-Operation and Integration Among Developing Countries,
929
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 929 1978
LAW & Pouey IN INTERNATIONAL BUSINESS
Time limits against prolonged use of funds should also be required. This reflects concern over excess storage charges which
could undermine the finances of individual commodity organizations by reducing resale profits. Time limits would encourage quick
turnaround and discourage precipitate market intervention.
2. Administration
- As stated at the beginning of this article, there is widespread
agreement that" the Fund should finance international (and possibly
coordinated national) stocking operations, although it is still an
open and disputed question as to what other measures the Fund
might finance. Considerable controversy exists as to the circumstances, if any, under which the Fund itself, and not commodity
organizations, should intervene in market operations.
In UNCT AD documents these "temporary market interventions"
are referred to as requiring "special safeguards" and raising "certain financial and managerial issues, including the amounts necessary for such measures, agreed procedures for decision-making
and the availability of specialized personnel knowledgeable in
commodity trading."173 As complex as these issues are, the Secretariat of UNCT AD recommends that the Fund be given authority to intervene, for a limited period, in markets of commodities for
which commodity arrangements do not yet exist. 174 Reference is
made to a provision for "emergency price support" in the absence
of a commodity organization and the Secretariat recommends that
the stocks be transferred, together with the corresponding liability
(the purchase cost and the accrued storage and interest charges) to
the commodity organization when (if ever) established. 175
Unfortunately, nations benefiting from international price supports for which no direct charge is made to them have little incentive to establish an organization to takeover these debts. This is
true even though the condition would be attached that producing
countries agree to initiate the establishment of an ICA. The Fund's
only effective legal safeguard would be to require producing states
Compilation of the Principal Legal Instruments, U.N. Doc. TD/B/609/Add. I, at 141 (Aug. 24,
1976) (Art. 14, Agreement Establishing the Asian Development Bank), cited in Common Fund:
Mode of Operations, supra note 75, at 12.
173 Issues Relating to a Common Fund, supra note 62, at II.
114 See A Common Fund, supra note 164, at 24.
17.
[d.
930
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 930 1978
A COMMON FUND
to agree to lmtlate negotiations and assume the debts if negotiations failed to reach agreement.
Provision must also be made for some degree of market transparency. For the Fund to estimate its cash flow requirements it will
require access to figures on forward supply and demand for commodities covered by the IPC. This necessitates information from
the OECD, producer states and commodity organizations. Certainly in relation to ICAs, the Fund's charter should mandate an
ongoing exchange of information as a prerequisite to lending operations. This would also facilitate establishment by the Fund of
knowledgeable limits on revolving credits offered to individual
ICAs.
Relations with ICAs
In addition to the right to intervene in a commodity market not
covered by an existing agreement the Fund should have certain rights
of intervention and intercourse in its relations with existing ICAs.
The choice is essentially between an arms-length approach, with the
Fund only acting upon application of the ICA, or an integrated
approach, with the Fund taking a major role in supervising the
activities of ICAs and possibly even with commodity organizations
assisting in the management of the Fund. 176
As indicated earlier the Fund must, at least in its initial stages,
carefully regulate lending to ICAs and ensure that intervention policies are reasonable with respect to each commodity within the IPC.
There appears to be strong support for a high degree of autonomy for
commodity organizations,177 which reflects the need for swift market intervention without delays for consultation with Common Fund
officials. The Swiss have argued that exclusive power should be vested
in each ICA to decide on the appropriate method of financing. 178
This is consistent with the vision of the Common Fund as the normal,
but not exclusive, source of finance, and leaves the ICAs free to use
their own resources or those of the IMF or individual governments.
Such independent authority would be particularly advantageous,
indeed necessary, in cases of long-term market decline, lengthy
Amounts, Terms and Prospective Sources of Finance, supra note 82, at 24.
See, e.g., Issues Relating to a Common Fund, supra note 62, at 4; Draft Report of the
Common Fund Negotiating Conference, supra note 28, at 7, 12.
178 Swiss Comments, supra note 38, at 3.
176
177
1978]
931
HeinOnline -- 10 Law & Pol’y Int’l Bus. 931 1978
LAW & POLICY IN INTERNATIONAL BUSINESS
stockpiling periods, or cases of speculation against known Common
Fund financing limits.
A stronger argument exists for Common Fund control over diversification, marketing and other non-stocking activities of commodity
organizations. The power to review proposed projects and establish priorities would be consistent with the need to coordinate
the Integrated Programme. Whatever compromise is reached
should give the Fund power to establish general criteria for all its
lending activities.
PROSPECTS FOR A NEGOTIATED AGREEMENT
There are three fundamental areas of disagreement in current
Fund negotiations: whether the Fund should be a "source" or a "pool"
of finance; whether the Fund should finance any operations other
than stocking; and whether the Fund's management should be organized to ensure decisive control by developing countries. Each issue
is viewed by Group B and the Group of 77 as of fundamental importance.
One of the most significant stumbling blocks to approval of the
Fund is the issue of management control. The Group of 77 is quite
frank about their desire to have a decisive role in decision-making.
This partly explains why developing countries are so adamant that
the Common Fund be endowed with significant powers and resources. Since they are largely exporters, developing countries
cannot have a decisive role in individual ICAs which are equally
controlled by exporters and importers. But if they can control the
powerful central institution they can influence the entire course of
the IPC.
There is nothing Machiavellian about this attitude. The basic objective of the IPC is, after all, to improve the well-being of developing
countries. Resolution 93(IV), agreed to by the developed and developing countries, expressly states that "concentrated efforts should be
made in favor of the developing countries."179 It is those countries
themselves which have the most to lose or gain from the IPC.
With negotiations for the Common Fund stalled and ICA
negotiations behind schedule, the IPC cannot be implemented by the
end of 1978 as called for in Resolution 93(IV).lsO One consequence of
119
180
Resolution 93(IV). note 7 supra.
[d. at 7. See note 36 supra forthe status of negotiations at the time this article was written.
932
(Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 932 1978
A COMMON FUND
this delay is that the catalyzing role of the Fund may well be lost. Since
ICA negotiations are continuing while the Fund is stalled, there is no
longer any possibility that the Fund will cause a rush to form new
ICAs and result in unneeded stockpile agreements, as developed
countries have feared. UNCT AD's hope that the Common Fund
would serve as a catalyst for new ICA's has thus been defeated.
For the same reason the "pool" versus "source" debate is becoming
increasingly academic as new agreements, such as the recent Sugar
Agreement, are created as self-financing or supplemented by contributions from members. If this trend continues a large source of
funds will already have been created and the only feasible option for
the Fund will be to pool these ICA finances, and possibly combine
them with limited contributions by governments.
As suggested above, a likely ground for compromise is to allow the
m~jority of members to exercise day-to-day control over Fund activities while requiring weighted or qualified majority voting where
crucial issues are involved. If such a compromise were adopted,
industrialized nations would have an opportunity to exercise a
great deal of indirect control over the entire IPC. The linking of
Common Fund financing to preconditions in the ICAs would help
safeguard Fund assets, increase' the equitable distribution of its
lines of credit, and lower the risk of a run on the bank. If the Fund
agreement were so drafted its pivotal role would be assured as a
coordinating and moderating influence at the heart of the IPC.
Developed countries should reverse their opposition to a Common
Fund and instead focus their efforts on molding an agreement
aimed at preventing the potential abuses which they fear may
result.
LEGAL SAFEGUARDS AND CONDITIONS
The economic and political realities of world commodity trade and
its regulation will place great strain on the IPC and its central financing
institution. If the Fund is to be more than a short-lived organization,
quickly drained of its resources on terms which permit only limited
chance of repayment, then it must have power to protect itself. The
most effective set of protective measures would have two dimensions.
One dimension is the array of safeguards, such as limits on the
duration of loans, that protect the Fund from being quickly drained
of resources. But a program that relies solely on safeguards to limit
the Fund's exposure may prove inadequate if it is unable to attach
1978]
933
HeinOnline -- 10 Law & Pol’y Int’l Bus. 933 1978
LAW & Pouey IN INTERNATIONAL BUSINESS
adequate lending conditions to protect against default or delays by
borrowers. Thus, as an added dimension, the Fund should attach
conditions, such as export quotas, to loans to insure that commodity
operations are carried out in such a fashion as to make repayment of
the loan likely. The two concepts are inseparable and both are crucial
to ensuring the Fund's viability.
Just as the Fund will take steps to protect its resources from
unrestricted borrowing, it can be expected that those states asked
to contribute the larger subscriptions will themselves press for
terms that ensure their uncalled capital is not called because of
defaults on Fund loans. Eugene Rotberg, Treasurer of the World
Bank, has explained its members' position as follows:
[S]ince access to public markets depends upon the market's perceptions of our financial integrity, we can see,
again, why member stockholders who have unpaid capital
at risk ... have insisted, and will insist, that we conduct
our affairs in such a way that we will remain a prime
credit in the eyes of potential bondholders. . . . [O]ur
member countries have a strong incentive to insure that
the unpaid subscribed capital of the Bank ... need never
... be called . . . . Thus we operate the Bank as if that
guarantee of callable capital did not exist. ISI
Member countries can best ensure that their capital is not called by
providing access to capital markets in their own countries. But
access to national markets turns on the market's perceptions of the
Fund's viability, and member countries can be expected to require
that the Fund's operations and policies be in line with sound banking practice so that when access to capital markets is granted the
Fund's bonds are purchased.
These principles must be understood in light of certain accepted
assumptions about the Fund. It must be operated on a profit making basis in order to generate sufficient funds to attract bond purchasers. The Fund must also ensure its viability by possessing power
to review ICAs and their proposed stocking arrangements.
Inherent in the power of the Fund to protect its resources by
monitoring the ICA's ability to repay loans is the power to persuade commodity organizations to seek changes in their structure
or policies. This may take the form of imposing preconditions to
181
E.
ROTBERG,
supra note 95, at 9, II.
[Vol. 10:887
934
HeinOnline -- 10 Law & Pol’y Int’l Bus. 934 1978
A COMMON FUND
finance or conditions on borrowing beyond mInImUm limits. A
summary discussion of some recommended and possible conditions
follows.
(1) The Fund should be able to require the use of production or
export controls, particularly in cases where oversupply is a traditional problem. Failure to do so may result in speculators selling off
excess supplies in the face of a stockpile commitment to purchase.
The downward pressure on prices thus created could prevent subsequent sales from the stockpile and force the ICA into default.
(2) The Fund should be able to mandate use of other elements of
the IPC where appropriate; multilateral commitments, compensatory finance and diversification can all complement stocking operations and each other. The advantage of UNCT AD's Programme
over previous proposals to deal with commodity problems is its use
of interrelating mechanisms. For example, commitment agreements establishing minimum sales and purchases to take place
within an agreed price range quite obviously make the effort to
stabilize prices through stocking easier and more effective. At the
same time the existing measures to stabilize prices enhance the
appeal of commitment agreements because they minimize the possibility of buying cheap. Such advantages can only accrue if new
ICAs adopt a number of interrelated mechanisms, but this does not
appear to be happening. Although negotiations to establish new or
revised ICAs as part of the IPC are continuing at a slow but steady
pace, no UNCTAD proposals have been made to utilize the four
interrelating mechanisms in these new agreements.
(3) Many early decisions made by ICAs or by the organizations
established by these agreements will have a tremendous impact on the
Fund. While the Fund should not be able to dictate decisions on such
things as stock size, grades stocked or location of stock storage sites, it
should have some influence. Since decisions on these points will affect
the amount of financing needed from the Fund, it is urged that the
opportunities for such influence in negotiation be made more formal.
Any action, however, must await conclusion of a Fund agreement
itself. In the interim, the UNCT AD Secretariat must guide pending
negotiations.
(4) Indirect controls over maximum stock holdings are needed.
Limits on the size or duration of stockpiles utilizing Fund resources
are needed so that prolonged use of borrowed funds or disproportionate borrowing does not occur.
1978]
935
HeinOnline -- 10 Law & Pol’y Int’l Bus. 935 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
(5) Measures to counteract excess accumulation of stocks must
be available. The Fund should require periodic review of support
price ranges-at least once every six months. Too high a range
could easily lead to rapid and costly accumulation of stocks. The
Fund could also require that the buffer stock manager be given
standby authority to impose export quotas on a predetermined pro
rata share of export sales. This would avoid the delays in drawing
up quota measures where a Councilor other governmental meeting is necessary before action could be taken.
(6) Where a commodity has been in long-term price decline the
Fund should require, as a prerequisite to financing, both a diversification plan for producers and an export quota scheme.
(7) When a commodity is undergoing a lengthy, but temporary,
adverse price cycle the effects on the Fund's profitability could be
mitigated by providing loans which limit the duration and size of
commodity stock holdings. Where a commodity organization needs
longer term or larger amounts of finance, it should turn to its
member states or other international financial institutions for subsidies on its loss-making operations.
In addition to its relations with ICAs, the Fund's success requires
adherence to certain other principles and legal safeguards. These
would be more effective if established by the Fund agreement itself
or adopted by the Council. This would give greater certainty to
prospective investors than if these were merely "procedures" currently used by management. Although many of the necessary legal
safeguards are already widely agreed upon, some need to be emphasized.
The financial soundness of the Fund, in large part, depends
upon its debt to equity ratio. Initially that ratio should be very low
with member states paying in a large proportion, at least one-third,
of their subscribed capital contributions. In the event that a significant number of larger industrial nations do not join, the remaining members may have to pay in a larger proportion of their
subscriptions. Fund reserves will be almost nonexistent at first. But
the extent of reserves is an important factor in selling bonds to
increase capital because the reserves form further protection for
bondholders. Thus profits should be plowed back as quickly as
possible to build up the reserve account.
In the Fund's lending activities separate accounts should be
maintained for stocking operations and non-stocking operations.
[Vol. 10:887
936
HeinOnline -- 10 Law & Pol’y Int’l Bus. 936 1978
A COMMON FUND
Loans in these two categories are quite different in nature and
duration. Stock loans are essentially short to medium term, extended on revolving credit and can be secured against stock warrants. Other types of loans are both longer term and unsecured
and thus less creditworthy. Separate accounts will minimize effects
that problems with long-term loans might have on the Fund's
credit or its main activities.
The terms of loans should require that they be repaid in the
same currency as issued. Revolving automatic credits should be
limited. A review of the market situation (e.g., price targets and
stock size) would be made for loans greater than the automatic line
of credit. An overall limit on borrowing by one commodity organization might be helpful, but knowledge of such a limit might
encourage speculation.
Finally, it has been proposed that the Fund might in some circumstances intervene directly to stabilize markets for a commodity
not covered by an agreement. Such direct activity should only
occur where producing states have agreed with the Fund to
negotiate an ICA and to assume the debts resulting from market
intervention in the event no ICA is concluded.
CONCLUSION
In negotIatIons on the Common Fund there is room for compromise and interested countries should be willing to make concessions. The present commodity negotiations require a spirit of
cooperation and enlightened self-interest. No country can claim a
vested interest in unstable commodity markets, nor can any country benefit from maintaining the majority of countries in poverty.
Only with increasing income in all countries will developed countries have continued markets for their industrial exports.
What are the sources of this enlightened self-interest? Where will
nations perceive their best interest to lie? All nations should see the
benefits in a new economic order. Developed nations have a great
deal to gain from regulation of international commodity trade if it
assures adequate supplies of raw materials. Developing nations
would gain new markets in the western world for their processed
primary products and labor intensive products, and greater access
to the capital, technology, and know-how essential to their development plans. Botl). developed and developing countries stand to
benefit from measures that stabilize developing country income.
1978]
937
HeinOnline -- 10 Law & Pol’y Int’l Bus. 937 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
Compensatory finance combined with stocking and commitments
will enable development to continue without the disruptions caused
by commodity income fluctuations. This in turn will reduce the
pressure on developed countries, currently in a recession, to increase their financial aid.
Stable prices will also encourage more investment in production,
which is badly needed if future supplies are to be adequate. Many
developing countries are heavily dependent upon commodity export taxes, thus stabilized demand and prices will generally mean
more stable governmel!.t revenue.
The single most important gain arising out of an international
commodity program would be the lessening of inflationary
pressure on the prices of manufactured goods. Because of the
"ratchet effect" of commodity price instability, prices of manufactured goods rise in response to commodity price increases while the
converse is generally not true. When coffee beans soared so did the
price of processed coffee on grocers' shelves, yet no one really
expects retail coffee prices to drop in the same proportion as coffee
bean prices have dropped. Price stabilization of coffee and other
commodities would therefore diminish this ratchet effect and
would moderate world price increases. Professor Behrman's empirical study indicates that the United States alone could gain $15
billion over a decade from reduced inflationary pressures if only
the ten core commodities were stabilized. 182 Thus it is quite possible that importing countries could gain more than exporting nations.
If negotiations on the Common Fund were successful it might
also set the stage for cooperation in other areas. For example,
developed countries need active collaboration with developing
countries to solve the global problems of pollution, environmental
safety and population control, but distrust among these countries
inhibits meaningful cooperation. Developing countries particularly
feel that the developed countries lack a genuine commitment to
change in the international economic order. The Fund negotiations
are therefore a crucial test of the developed countries' commitment
to take concrete and positive steps toward implementing the necessary structural changes in the existing order.
For renewed negotiations to succeed, the dialogue between nations must turn away from the rehashing of old arguments. The
182
J.
BEHRMAN,
supra note 40, at 38-39.
938
[Vol. 10:887
HeinOnline -- 10 Law & Pol’y Int’l Bus. 938 1978
A COMMON FUND
records of past negotiating sessions reveal little flexibility by
spokesmen for these nations. This may be attributed in part to the
nature of the UNCTAD negotiating process-a process whereby
the groups of nations can only advance positions upon which almost all its members agree. Under such conditions bargaining
positions cannot develop beyond the most basic points of consensus. Yet neither Group B nor the Group of 77 seems to have
resolved the internal divisions that keep them from responding
with more constructive proposals. Within Group B there are well
known differences between the United States and the EEC as well
as differences between the Nordic countries and the Netherlands
as a group against the rest of Group B.
The differences in the Group of77 are much more severe. Because
the parties are under considerable pressure in such conferences to
put on appearances of agreement, the official record of the negotiating conferences is not very frank because parties use it to submerge
their differences. Because the parties are under considerable
pressure to give the appearance of agreement the record fails to
disclose the fundamental gaps that permeate the discussions. But the
Group of77 differences have significantly hampered negotiations. 183
Concessions acceptable to some members are blocked by others. Each
member perceives different interests to be at stake. Some major
countries like Brazil and Mexico have substantial interests both as
traditional exporters and now, with the development of substantial
new industries, as heavy importers. 184 Others feel they are managing
well through unilateral or bilateral programs and through producer
associations. Thus, Morocco, the largest single producer of phosphates (50 percent world output) did not even attend the recent
UNCTAD Conference on an ICA for that commodity.185 Many states
are currently members of producer agreements, such as those for
copper and bauxite, and are resisting their products being merged
into the larger IPC.186 Some states even challenge the basic elements
of the IPC. Brazil, for example, believes stockpiling to be counterproductive because it causes increased use of synthetic substitutes.
Thus, it is still an open question whether the Group of 77 can
maintain effective and unified pressure for the IPC and the Fund.
183 Interview with Mr. Charles Angevine, Office of Commodity Policy, Department of
State, in Washington, D.C. (Apr. 26, 1978).
184 Erb & Fisher, supra note 8, at 492.
18. Interview with Mr. Charles Angevine, note 183 supra.
186 Erb & Fisher, supra note 8, at 494.
939
1978]
HeinOnline -- 10 Law & Pol’y Int’l Bus. 939 1978
LAW & POllCY IN INTERNATIONAL BUSINESS
Even with a unified position it is not yet known whether the Group
wants the Fund badly enough to bargain for it. Certainly there have
been few if any concessions or compromises by the Group thus far.
There is a dilemma for each state, developing and developed. The
dilemma lies in the essential requirement that each must contribute
now in hopes of gaining in the longer run. There will be short-term
costs for all because the New International Economic Order is not
one-sided. The dilemma for negotiators in the coming years is to
decide how these costs and gains are to be spread fairly. The answer
cannot and will not be based upon economic criteria. The issues are
too complex in their ideological and political overtones to turn on
economic efficiency alone.
The choice is between confrontation on the one hand, and cooperation based on compromise on the other. Such compromise, based
upon perceived mutual self-interests, requires weighing the costs of
continuing confrontation, both political as well as economic, against
the potential benefits of cooperation on these issues.
940
HeinOnline -- 10 Law & Pol’y Int’l Bus. 940 1978