December 18, 2001
The World Bank sets up mechanism to cushion developing countries from volatility in commodity prices. The Bank expects the hedging mechanism to be ready in February 2002.For many poorer countries commodities like cocoa are the primary exportThe World Bank is on the verge of setting up a mechanism to cushion developing countries from wild price shifts in commodities markets.
A dependence on raw materials - metals, oil, rubber, cocoa, coffee and other agricultural products - is a characteristic of many poorer countries.
But prices of most commodities have slumped in recent years, and in any case the volatility of commodities markets has a huge effect both on developing economies and on the people that produce the materials.
Since 1999, the Bank has been trying to find a way of flattening out the markets' peaks and troughs.
And by February next year, according to the head of a task force working on the issue, it should have a hedging mechanism ready to go before the Bank's board.
"I personally hope to see something functional on the ground during 2002," said the task force head, Roy Leighton.
Same as corporations
The scheme Mr Leighton and the task force are developing is intended to allow both individuals and organisations within poor countries access to the same means of protecting against risk that richer countries and large corporations use.
The tool is hedging: the process of making deals which guarantee a price for a commodity at a future date.
By buying options - the right, although not the obligation, to sell a specific quantity of a good on a particular date at a preset price - the risk is lessened.
That way, Mr Leighton said, the risk becomes one of production rather than finance.
During trials - of copper, cocoa, rubber and crude oil in Uganda, Tanzania, Mongolia, Thailand, El Salvador and Mexico - financial institutions have been prepared to fund the premium needed by producers to take out the options, often through a local co-operative.
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