Increasing food prices: what solutions to increase gains for rural poor and decrease risks for urban poor and developing countries?

Dani Rodrik comment in a very insightful post a statement made by Mr Zoellick that show how many decision-makers does not understand neither what is going on in agricultural markets nor what will be the impacts on development and poverty of high prices. In fact, they merge the old discourse (high agricultural prices = gains for developing countries) with a new one (high prices = problems for urban poor). Either discourse it is true but we need an analysis that take into account both and that provide some solutions.

To start, we should remember three elements:

• High food prices are caused by biofuels and emerging countries growing demand but also by speculation on commodities markets.

• 2/3 of the poor lives in rural areas and depends on agriculture and many of the urban poor are former peasants.

• Many developing countries, even if they are net importing countries, have still an important potential in expanding their agricultural production.
  

These elements mean that high agricultural prices are positive for most poor in developing countries but the risks are very high because urban poor uprising (caused by high food prices) can destabilize several developing countries.

This mean that we need to find solutions to reduce these risks and the adjustment costs. Developing countries need neither more food aid (which often create many problems) nor laissez-faire.

Developing countries need active rural development policies (founded also through Aid), which will increase their agricultural production (also by helping urban poor to come back to rural areas that they leaved) and some policies to decrease food prices in urban areas (notably by creating food stocks filled by national production). These policies need important resources that should be provided by bilateral and multilateral donors. The problem is that, even after the last World Development Report, I do not see an upward trend in Aid dealing with rural development and food policies in developing countries.

agriculture sustainable development WTO food prices

WTO Agricultural Negotiation Update

Yesterday, the WTO released the following news on the advances of agricultural negotiations of the Doha “Development” Round:

Intensive consultations among a group of importing and exporting countries will be allowed to continue for a few more days in an effort to achieve a breakthrough that would also allow progress in the agriculture talks as a whole. By 31 March or earlier New Zealand Ambassador Crawford Falconer, who chairs the talks, will reconvene multilateral talks so that representatives of the full membership can negotiate the outcome and continue with other major issues, leading to a revised draft blueprint of the final deal. That is what he concluded after hearing members’ comments on 14 March 2008.

For more information and to listen Mr Falconer declarations go to this WTO page.

We will see if this process will create a breakthrough in the negotiations. Personally, I am not very confident that this will happen at least for two reasons:

1. There are still a large amount of issues where Members have very far positions.
2. An important number of Members (e.g. the US) have not enough political will to agree on the necessary concessions.

Furthermore, in the last seven years I heard many times that a breaktrough was feasible and that they will respect a dedline that they agree. Almost every of these deadlines were posponed. They lose their credibility. Nevertheless, a miracle or a surprising outcome it is always possible as the Uruguy Round showed us.

WTO global governance agriculture

What role plays agriculture in economic development?

In 2007-2008 agriculture became once again a major issue in the global agenda. Even, the World Bank recognizes the importance of this sector for economic development in its 2008 World Development Report. Another reason is linked to rising prices of agricultural commodities caused by drought in some major exporting countries (e.g. Australia), rising global consumption and growing use of agricultural commodities for biofuels. Some actors underlined that the 21th century will be the agricultural century.

Agriculture plays for sure an important role in development. In fact, according to IFAD, 2/3 of poor in developing countries live in rural areas.

Agriculture debates at the international level are always linked with the trade dimension. In fact, even if only around 10% of the global production is traded, trade plays a crucial role in agriculture because it influences greatly prices. Trade in crucial for farmers incomes as well as for the added-value produced by the agricultural sector. For this reason, agricultural negotiations at the WTO are very difficult.

Economic history, as Reinert and other authors show us, can give us some insight on the role of agriculture in development:

• Never in the history a country succeed to achieve development through its agricultural sector. In fact, often agricultural products are subject to decreasing returns that, as we showed in a post on trade and development linkages, does not enable a country to develop successfully. Nevertheless, some products can be subject to increasing returns notably rare products (Japanese beef meat from cow daily massed with sake), transformed and typical products (e.g. Swiss cheese, wine, etc.) and likely biofuels.

• Never in the history was rural development possible without the presence in the same region/country of an industrial sector providing inputs and tehcnological innovations. Historically only industrialization allowed to raise durably productivity in agriculture.

Nevertheless, agriculture can play an important role in development event if we take into account what the history tell us:

• Agricultural exports enable countries to increase their incomes that can be used to implement a strategy of industrialization and of development of an advanced service sector. An interesting option to start industrialization is to create an industry that transforms agricultural commodities. Often, this industry is easier to set up than high-tech industry. This will increase the country income, by climbing the value chain. These additional resources will be invested again in order to improve industrialization and create new industries, jobs and incomes. In this way, a developing country can start a virtuous economic development cycle.

• Agriculture can raising incomes and help poor farmers to increase their consumption and improve their education. These two outcomes will both increase the national/regional market size essential to allow the development of a national (temporary protected against international competition with tariffs) industrial sector and increase the opportunities of farmers (when productivity rise) to have the skills required to work in the industrial sector. This process is what we observed in developed countries history.
  

You will think: “If it is so easy, why only a bunch of developing countries succeed to achieve high growth rate?” The reason is quite simple. Developing countries faced huge difficulties to export their agricultural commodities at a fair price. Historically there were at least three reasons:

• Developed countries subsidies depressed international as well as developing countries local prices. This both decreased farmers and developing countries incomes and pushes out of business many farmers. For this reason, nowadays number of developing countries, even net importers of agricultural products, cannot fully profit of their production potential. Developed countries subsidies are a partial explanation of the growth success of many developing countries between the end of WW II and the 70s (when subsidies were relatively low in developed countries) and the growth low rates in the 80s and 90s (when developed countries invest large amount of money in subsidies).

• Developed countries, for long time basically the only market for developing countries, in order to protect their farmers, adopted high tariffs and implemented non-tariff measures that restrict greatly the acess to their markets. Subsidies also played a role. In fact, they caused overproduction and reduced the need of import. What is more, developed countries tariffs policies imposed higher tariffs on transformed products (tariff escalation) in order to protect their agro-industry. This constraint developing countries to continue to export commodities without having a chance to develop their transformation industry.

• World Bank and IMF structural adjustment policies constrained many developing countries to specialize in the production of agricultural commodities. These policies create overproduction that led to low prices.

• Agro-industry is an oligopoly of developed countries industries that take advantage of their dominant position by negotiating low prices with producers. This issue can be solved if the WTO rules will include an international antitrust policy. This was never very high on the agenda because developed countries want to continue to take advantage of their dominant position in many sectors.

Today, the situation is different. In fact, agricultural prices were very high the last couple of years. The consequences are that developing countries can use agriculture more profitably to start a sustainable development path. What is needed is a WTO agreement that:

1. Pushes developed countries to decrease their subsidies and opens their market (and eliminate tariff escalation);

1. Allows developing countries to implement policies (tariff and subsidies) to modernize their agriculture (and temporarily protect poor farmers until an industrial sector is developed) and to increase their competitiveness and export capabilities.

In conclusion, agriculture can be a powerful tool to start a sustainable growth and economic development. Nevertheless, barriers that prevent to realize this potential are still large. Doha Round negotiations do not seem to be likely to remove these barriers effectively.


References

IFAD (2001), Rural Poverty Report. The Challenge of Ending Rural Poverty

Reinert Erik S. (2007), How Rich Countries Got Rich... and Why Poor Countries Stay Poor, New York, Carrol And Graf

World Bank (2008), World Development Report. Agriculture for development

agriculture Economics Trade and Development WTO

Trade Preferences: Is Preference Erosion Really an Issue for Developing Countries?

One of the main issues in the current WTO Round is the problem of preference erosion. In fact, lower tariffs, caused by a Doha Round Agreement, mean that the products from developing countries, particularly those benefiting from preferences that go beyond the Generalized System of Preferences (SGP), will lose part of their competitive advantage.

A debate took place among scholars and International Organizations to assess if the preference erosion will have important impacts. It seems that a quite large number of developing countries, notably Least Developed Countries (LDC), will incur in significant losses caused by Preference Erosion.

The easiest solution will be to avoid liberalization in those products that are important in preferences as tropical products. However, we need to remember that an important number of developing countries export these products outside favorable preferences (the SGP is worse than schemes for LDC or ACP countries). We can find a solution to this issue only by acknowledging the importance of co-development. Neither interests form favorable preferences recipient nor do interests form developing countries exporters predominate.

Before trying to find a solution, we need to better understand advantages and limits of preferences.

The main positive point of preferences is to improve the competitiveness of products from poorest developing countries through more favorable tariffs. Preferences allowed a number of countries to export products (as sugar and bananas) where they were not competitive at the international level. Of course, for favorable preference recipient the end of preferences or the decrease of preference margins will have a significant impact.
Nevertheless, preferences have more negative than positive impacts. I will resume it in the following points:

• Preferences are unilateral concessions by developed countries. This is highly problematic. In fact, developed countries can use it to pressure preference recipient (notably this is what happen at the WTO, cf. Jawara and Kwa, 2004). Furthermore, often when these preferences are really utilized by developing countries they are suspended and/or restricted. I heard, for example, that Switzerland suspended and after restricted its SGP on refined sugar because developing countries (as Guatemala) started to take advantage of the preferences. It is easy to give a quota and duty free access to LDC countries that have not the productive capabilities to profit of these preferences (also because usually Rules of Origin are very strict) is less easy to give real favorable preferences to countries that have these capabilities.
• In more than forty years, preferences did not succeed to improve and diversify trade exports form poorest developing countries. In fact, preferences push recipient countries to continue to focus on a small number of commodities to export where they have a favorable market access. Preferences did not help these countries to diversify and to climbing the value chain (through industrialization and advanced services development). This system keeps alive the colonization trading system. The issue is that as we underlined in a previous post these elements are crucial to improve the positive impacts of trade on development.
• One of the most important preference schemes is disappearing. In fact, preferences between EU and ACP countries will become Free Trade Agreements called EPAs. That pose a number of problems that I will maybe analyze in another post.

If we take into consideration all these negative impacts of preferences and the interests of developing countries exporters, the solution seems to me quite clear:

We need to find a way to give up to preferences avoiding losses for recipient countries and helping them to develop both their productive capabilities and an effective use of trade in their development strategy.

I guess you will say: “That’s right but how we can achieve this?” In fact, this is the very difficult question. I think that the following measures should be implemented

1. Progressive liberalization of tropical products in 10 years. Every year tariffs should be decreased by the same amount. This will give enough time for adaptation of these sectors in preference recipient countries without causing too much damage to other developing countries. This is an option included in the WTO draft on agriculture (February 2008).
2. Implementing Aid for Trade with additional resources and by ensuring ownership by recipient countries. We are still far from this objective. This kind of aid should match with the trade strategy for development of recipient countries. This will be a key element for LDCs.
3. This in the most important point and it is not fully taken into account in the WTO draft. In order to give to recipient countries, notably the non-LDC developing countries, the possibility to implement an effective development strategy, these countries should have enough policy space to protect and support their advanced services and industrial sector. Only with these tools, they can diversify and develop their economy. Furthermore, developed countries should improve their chances to develop both sectors. They should give them temporary preferential margins (10-15 years) for recipient countries high value added exports notably by eliminating tariff escalation and by incite them to export transformed products instead of commodities. In order to avoid the creation of another useless preference schemes and help to improve the competitiveness of these sectors, developed countries should reduce progressively this preferential margin (same amount every year) after, say, 5 years. With these preferences these countries can built a “modern” economic sector that progressively will become competitive in the global markets.

In conclusion, the measures that I proposed will allow these countries to implement an effective development strategy without undermining trade opportunities for exporters. What is needed it a real commitment by developed countries to really help preference recipient countries to improve their development level.

The first two measures seem to me feasible. The problem is with the third one that requires a change of mindset by trade negotiators particularly form developed countries.

Of course, this it is only a proposition. I guess there is other innovative thinking on this issue. If you have one or if you simply want to give a critic assessment on this post simply write a comment.


References

Jawara F. and Kwa A., Behind the Scenes at the WTO. The Real World of International Trade Negotiations. The Lessons of Cancun, London and New York, Zed Books.

Picture reference

Codevelopment trade preferences WTO preferences erosion GSP

Doha « Development » Round likely to fail to meet 2008 deadlines

According to the World Trade Organization’s Director General Pascal Lamy, the negotiators can succeed to complete the negotiation Round before the end of 2008. For this reason, there is a project to organize a mini-ministerial conference around Easter.

Nevertheless, even if some negotiators tend to be relatively optimistic, an agreement in the following months is quite unlikely. In fact, there is huge divides between negotiators in agriculture and, even more, in the industrial sector negotiations (NAMA). The draft released few weeks ago by the chair of the negotiation committees fails to propose an agreement acceptable by all the Membership. What is more, they leave many points in suspense. Furthermore, the negotiations comprehend also other issues where is still difficult to reach a consensus.
Even if ministers will come to Geneva the next weeks they will probably not succeed to solve the huge amount of issues that are still unresolved.

click here to see the web site with this picture

Beyond these disagreements among negotiators, the main cause that explain the many deadlines, that were missed by negotiators on the last years, is that developed countries refuse to acknowledge by their actions that this Round is about development and, according to the negotiation agenda (2001 Doha Declaration,) it should readjust the balance of the international trading system. In fact, notably the last trade negotiation Round (the Uruguay Round) increased the inequality of the international trading system. Developing countries were forced to liberalize many sectors and make important concessions (services, Intellectual Property, Agriculture) without receive any valuable improvements in the sectors where they have offensive interests (notably agriculture).

From many years during the Doha Round negotiations, developed countries thought that, at the end of the day, they would succeed to impose an agreement to the developing countries. They did not understand that the world changed and that a coalition of developing countries driven by emerging countries will resist and show its offensive interests. Trade negotiations are any more a question of finding a deal between US and EU but they become more multilateral. To reach an agreement, developed countries should understand that this time they will be constrained to make some concessions to developing countries. This is the price to keep an institution like the WTO, that plays an important role in regulating the world economy by law, alive.

What is more, this lack of will (and of good faith) by developed countries, cause huge difficulties to reach agreement on the issues that are very important for their citizens as environmental and social standards. In fact, even if these issues are defendables in terms of their potential positive impact on sustaiable developement and, under some conditions, to what we called co-development, developing countries refused to negotiate it. They think that is simply another way for developed countries to protect their markets. This reaction is understandable considering the mercantilist way in which developed countries negotiate the issues that matte rfor developing countries (notably for the poorest) (see, for example, Special Products Issues or flexibilites on NAMA negotiations).

In conclusion, if we are optimist an agreement will be reached before the end of 2009. However, the Uruguay conclusion teach us that surprises and strong accelerations in negotiations are always possible even in the most unlikely situation.

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