Compensatory Finance: Options for tackling the commodity price problem

By Adrian Hewitt on November 14, 2007
Compensatory finance schemes were in vogue in the 1970s because this was a (fairly brief) period of commodity power. Rather than being a permanent adjustment mechanism in a globally Keynesian economy, they were used by industrialised countries as a calming mechanism and an antidote to a Common Fund which threatened over-regulation of commodity markets. Essentially compensatory finance schemes were a political response rather than an economic stabilisation fixture.

The paper reviews in detail the IMF's Compensatory Financing Facility and the EU's Stabex Scheme, and their variants, highlighting their strengths and weaknesses. Both of the main schemes petered out in the 1990s and by then were only missed for their aid allocation elements, rather than for the producer support or insurance function which had been the claimed purpose. They never shrugged off the tendency to be pro- rather than counter-cyclical.

Various efforts at broadening, globalising or updating them have not proceeded because the donors who effectively ran the schemes nowadays prefer interventions like direct budget support or the use of modern communications to improve market intelligence. Nevertheless, when the World Bank and the OECD donors pressed ahead with debt relief, it still found that commodity earnings instability was one of the reasons for their clients to miss their targets. Moreover, with a shift back to commodity production in state hands and sovereign wealth funds investing globally in commodities, and given the more recent security and sustainability concerns, this could be the time to make the case for international public funding of a global stabilisation-via-compensation mechanism again.

Report details

IISD, 2007