The Frontiers of Management. Peter F. Drucker
that now threatens so many of them.
But contrary to all these predictions, agricultural output in the world actually rose almost a full third between 1972 and 1985 to reach an all-time high. And it rose the fastest in less developed countries. Similarly, production of practically all forest products, metals, and minerals has been going up between 20 and 35 percent in these last ten years, again with production rising the fastest in less developed countries. And there is not the slightest reason to believe that the growth rates will be slackening, despite the collapse of prices. Indeed, as far as farm products are concerned, the biggest increase, at an almost exponential rate of growth, may still be ahead.*
But perhaps even more amazing than the contrast between what everybody expected and what happened is that the collapse in the raw-materials economy seems to have had almost no impact on the industrial economy of the world. Yet, if there was one thing that was “known” and considered “proved” without doubt in business cycle theory, it was that a sharp and prolonged drop in raw-materials prices inevitably, and within eighteen months to two and a half years, brings on a worldwide depression in the industrial economy. The industrial economy of the world is surely not normal by any definition of the term. But it is also surely not in a worldwide depression. Indeed, industrial production in the developed noncommunist countries has continued to grow steadily, albeit at a somewhat slower rate, especially in Western Europe.
Of course the depression in the industrial economy may only have been postponed and may still be triggered, for instance, by a banking crisis caused by massive defaults on the part of commodity-producing debtors, whether in the Third World or in Iowa. But for almost ten years, the industrial world has run as though there were no raw-materials crisis at all.
The only explanation is that for the developed countries—excepting only the Soviet Union—the primary-products sector has become marginal where it had always been central before.
In the late 1920s, before the Great Depression, farmers still constituted nearly one-third of the U.S. population, and farm income accounted for almost a quarter of the gross national product (GNP). Today they account for one-twentieth of the population and GNP, respectively. Even adding the contribution that foreign raw-materials and farm producers make to the American economy through their purchases of American industrial goods, the total contribution of the raw-materials and food-producing economies of the world to the American GNP is, at most, one-eighth. In most other developed countries, the share of the raw-materials sector is even lower than in the United States. Only in the Soviet Union is the farm still a major employer, with almost a quarter of the labor force working on the land.
The raw-materials economy has thus come uncoupled from the industrial economy. This is a major structural change in the world economy, with tremendous implications for economic and social policy and economic theory, in developed and developing countries alike.
For example, if the ratio between the prices of manufactured goods and the prices of primary products (other than petroleum)—that is, of foods, forest products, metals, and minerals—had been the same in 1985 as it had been in 1973, or even in 1979, the U.S. trade deficit in 1985 might have been a full third less, $100 billion as against an actual $150 billion. Even the U.S. trade deficit with Japan might have been almost a third lower, some $35 billion as against $50 billion. American farm exports would have brought almost twice as much. And our industrial exports to one of our major customers, Latin America, would have held; their near-collapse alone accounts for a full one-sixth of the deterioration in U.S. foreign trade. If primary-products prices had not collapsed, America's balance of payments might even have shown a substantial surplus.
Conversely, Japan's trade surplus with the world might have been a full one-fifth lower. And Brazil in the last few years would have had an export surplus almost 50 percent higher than its actual one. Brazil would then have had little difficulty meeting the interest on its foreign debt and would not have had to endanger its economic growth by drastically curtailing imports as it did. Altogether, if raw-materials prices in relationship to manufactured goods prices had remained at the 1973 or even the 1979 level, there would be no crisis for most debtor countries, especially in Latin America.
What has happened? And what is the outlook?
Demand for food has actually grown almost as fast as the Club of Rome and the Global 2000 Report anticipated. But the supply has been growing much faster. It not only has kept pace with population growth; it steadily outran it. One cause of this, paradoxically, is surely the fear of worldwide food shortages, if not of world famine. It resulted in tremendous efforts to increase food output. The United States led the parade with a farm policy successfully aiming (except in one year: 1983) at subsidizing increased food production. The European Common Market followed suit, and even more successfully. The greatest increases, both in absolute and in relative terms, have, however, been in developing countries: in India, in post-Mao China, and in the rice-growing countries of Southeast Asia.
And then there is also the tremendous cut in waste. Twenty-five years ago, up to 80 percent of the grain harvest of India fed rats and insects rather than human beings. Today in most parts of India the wastage is down to 20 percent, the result of such unspectacular but effective infrastructure innovations as small concrete storage bins, insecticides, or three-wheeled motorized carts that take the harvest straight to a processing plant instead of letting it sit in the open for weeks on end.
And it is not too fanciful to expect that the true revolution on the farm is still ahead. Vast tracts of land that hitherto were practically barren are being made fertile, either through new methods of cultivation or through adding trace minerals to the soil: the sour clays in the Brazilian highlands, for instance, or aluminum-contaminated soils in neighboring Peru, which never produced anything before and which now produce substantial quantities of high-quality rice. Even greater advances are registered in biotechnology, both in preventing diseases of plants and animals and in increasing yields.
In other words, just as the population growth of the world is slowing down, and in many parts quite dramatically, food production is likely to increase sharply.
But import markets for food have all but disappeared. As a result of its agricultural drive, Western Europe has become a substantial food exporter plagued increasingly by unsalable surpluses of all kinds of foods, from dairy products to wine and from wheat to beef. China, some observers now predict, will have become a food exporter by the year 2000. India has already reached that stage, especially in respect to wheat and coarse grains. Of all major noncommunist countries only Japan is still a substantial food importer, buying abroad about one-third of her food needs. Today most of this comes from the United States. Within five or ten years, however, South Korea, Thailand, and Indonesia—low-cost producers that are increasing food output fast—will compete with the United States to become Japan's major suppliers. The only remaining major world-market food buyer may then be the Soviet Union, and Russia's food needs are likely to grow. However, the food surpluses in the world are so large, maybe five to eight times what Russia would ever need to buy, that the Russian food needs are not by themselves enough to put upward pressure on world prices. On the contrary, the competition for access to the Russian market among the surplus producers—the United States, Europe, Argentina, Australia, New Zealand (and, probably within a few years, India as well)—is already so intense as to knock down world food prices.
For practically all nonfarm commodities, whether forest products, minerals, or metals, world demand itself—in sharp contrast to what the Club of Rome so confidently predicted—is shrinking. Indeed, the amount of raw materials needed for a given unit of economic output has been dropping for the entire century, except in wartime. A recent study by the International Monetary Fund* calculates the decline as being at the rate of one and a quarter percent a year (compound) ever since 1900. That would mean that the amount of industrial raw materials needed for one unit of industrial production is now no more than two-fifths of what it was in 1900, and the decline is accelerating. Even more startling are recent Japanese developments. In 1984, Japan, for every unit of industrial production, consumed only 60 percent of the raw materials she had consumed for the same amount