Food Crises and the WTO: World Trade Forum

FOOD CRISES AND THE WTO

The food and financial crises of 2008 and 2009 have pushed millions more people into poverty and hunger, while changing the parameters of international trade. Both crises have also challenged the fundamentals of WTO rules regulating agriculture, which had been designed to combat trade distortions due to artificially low-priced food commodities. This collection of essays examines to what extent the multilateral trading system contributes to food security in today’s volatile markets. Bringing together a renowned group of expert economists, lawyers, and environmental and development specialists, it offers a fresh and multidimensional perspective combining a strong economic analysis with a comprehensive legal assessment of the interface between food security and international trade regulation. Together, the contributions provide concrete policy recommendations on how the WTO could play a positive role in preventing or mitigating future food crises and in promoting global food security. b a r i s k a r a p i n a r and c h r i s t i a n h a¨ b e r l i are senior research fellows at the World Trade Institute, University of Bern, Switzerland.

FOOD CRISES AND THE WTO World Trade Forum

BARIS KARAPINAR and CHRISTIAN HÄBERLI

cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521191067 © Cambridge University Press 2010 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2010 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this publication is available from the British Library ISBN 978-0-521-19106-7 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

CONTENTS

List of contributors List of figures ix List of tables xii List of abbreviations Preface xvii 1

page vii

xiv

Introduction: food crises and the WTO bari S karapinar

1

Economics of the food crisis

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PART

1

2

The food price crisis, poverty and agricultural trade policy 25 will martin and maros ivanic

3

Globalisation of agriculture and food crises: then and now 49 eugenio d
i az-bonilla

4

Solving the food crisis in Africa: achieving an African Green Revolution 81 akinwumi a. adesina

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Rising food prices: causes, consequences and policy responses 109 wayne jones and armelle elasri

6

Shift and swing factors and the special role of weather and climate 136 josef schmidhuber and ira matuschke

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contents PART

2

Trade and law: WTO and beyond

165

7

Agricultural policies: past, present and prospective under Doha 167 kym anderson

8

The food crisis and the role of the EC’s Common Agricultural Policy 187 bernard o’connor

9

WTO disciplines and economic dimensions of the 2008 US Farm Bill 220 david orden

10

Impact of the food crisis on developing countries and implications for agricultural trade policy 242 michael herrmann and ralf h. peters

11

Responses by the international trade and aid community to food security 273 susan prowse

12

Food security and WTO rules € berli christian h a

13

Conclusions and policy recommendations 323 € berli bari S karapinar and christian h a Index

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297

CONTRIBUTORS

akinwumi a. adesina, Vice President for the Alliance for a Green Revolution in Africa and Associate Director, The Rockefeller Foundation, Kenya kym anderson, Professor of Economics, University of Adelaide in Australia and Senior Consultant, World Bank eugenio d
i az-bonilla, Executive Director, Inter-American Development Bank armelle elasri, Principal Research Assistant, Trade and Agriculture Directorate, Organisation for Economic Co-operation and Development (OECD) christian ha¨ berli, Senior Research Fellow, World Trade Institute, University of Bern michael herrmann, Economist, United Nations Conference on Trade and Development (UNCTAD) maros ivanic, Lead Economist, World Bank wayne jones, Division Head Agri-food Trade and Markets Directorate for Trade and Agriculture, Organisation for Economic Cooperation and Development (OECD) baris karapinar, Senior Research Fellow, World Trade Institute, University of Bern will martin, Lead Economist, World Bank ira matuschke, Economist, Food and Agriculture Organization of the United Nations (FAO) bernard o’connor, Professor of Law, O’Connor & Company, Brussels vii

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list of contributors

david orden, Senior Research Fellow, International Food Policy Research Institute (IFPRI) and Director, the Global Issues Initiative of Virginia Tech, USA ralf h. peters, Economist, United Nations Conference on Trade and Development (UNCTAD) susan prowse, Senior Adviser, Department for International Development, UK (DFID) josef schmidhuber, Head of Global Perspective Studies Unit, Food and Agriculture Organization of the United Nations (FAO)

FIGURES

Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5 Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4 Figure 3.5 Figure 3.6 Figure 3.7 Figure 3.8 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Figure 5.7 Figure 5.8 Figure 5.9 Figure 5.10

Poverty rates in rural and urban areas page 27 Percentage point poverty changes following a 10 per cent rise in specific commodities without wage impacts 29 Comparison of the average poverty impacts of a 10 per cent food price increase under different labour closure scenarios 30 Price insulating policies in the market for rice in Southeast Asia 42 Policy responses of developing-country governments expressed as share of the 120 countries surveyed 42 Nominal index of agricultural prices 51 Growth rate: nominal index of agriculture 52 Nominal indices 55 Percentage change of nominal indices 56 Real indices (CPI deflated) 59 Ratio price crops/price fertilisers 61 World growth 64 Energy, agriculture, environment, and poverty 76 Wheat, coarse grains, rice, oilseeds – real and nominal prices 1970–2017 110 Deviation from trend in wheat and coarse grain yields 111 US$/Euro exchange rate: historical and projected 112 Global stock to use ratio, maize, wheat and vegetable oil 113 Outlook oil price forecast 114 Weekly wheat, maize, rice and oilseeds prices for 2008 117 World commodity prices in nominal and real terms, 1998–2007 and 2008−2017 119 Imports 2015–2017 and 2005–2007 by commodity, OECD and developing countries 120 Sensitivity of projected world prices to changes in assumptions, percentage difference from baseline values, 2017 121 Food price contribution to consumer price inflation for selected countries 123

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list of figures

Figure 5.11 Net trade in agriculture, developing countries and least-developed countries, 1960–2003 126 Figure 5.12 Incidence of food price policies in developing countries (% of 120 countries) 127 Figure 5.13 Incidence of safety net programmes in developing countries (% of 120 countries) 128 Figure 5.14 Producer support estimate by country as a percentage of value of farm gross receipts 130 Figure 5.15 OECD: Composition of producer support estimate (percentage share in PSE) 131 Figure 5.16 Impact of removal of biofuel support on world commodity prices, 2013–2017 average 133 Figure 6.1 World cereal stocks, 1981–2008 139 Figure 6.2 Global cereal yields, 1979–2007 141 Figure 6.3 Net cereal imports by China and India, 1980–2007 146 Figure 6.4 Relationship between food prices and temperature increases, according to different studies 155 Figure 7.1 Real international food price index, 1900 to 2008 168 Figure 7.2 Nominal rates of assistance to agriculture in high-income countries (HIC) and European transition economies and in developing countries, 1955 to 2004 (per cent, weighted averages, with ‘decoupled’ payments included in the dashed HIC line) 172 Figure 7.3 Gross subsidy equivalent of NRAs in high-income and European transition economies and in developing countries, 1960 to 2007 (constant 2000 US$ billion) 173 Figure 7.4 Nominal rates of assistance to exportable, import-competing and all covered agricultural products, high-income and developing countries, 1955 to 2007 (per cent) 174 Figure 7.5 Nominal rates of assistance to agricultural and non-agricultural sectors and relative rate of assistance, developing and high-income countries, 1955 to 2004 (per cent, production-weighted averages across countries) 175 Figure 7.6 Relationship between RRA and the trade bias index for agriculture, various regions, 1980–1984 and 2000–2004 177 Figure 7.7 Trade reduction and welfare reduction indexes for tradable farm products, by region, 1960 to 2007 (per cent) 178 Figure 8.1 EC share in world’s cereal production 189 Figure 8.2 EU share in world meat production 190 Figure 8.3 EU-15, EU-25 agricultural trade balance 194 Figure 8.4 EU agricultural imports by origin 195 Figure 8.5 EU-25 import value of main products 195

list of figures Figure 8.6 Figure 8.7 Figure 8.8 Figure 8.9 Figure 8.10 Figure 9.1 Figure 10.1 Figure 10.2 Figure 10.3 Figure 10.4 Figure 12.1

Comparison of agricultural imports from developing countries (DCs) 196 Comparison of countries’ agricultural imports from least-developed countries 197 EU-25: agricultural exports by destination 198 EU-25 main agricultural exports 198 A graphic representation of the main CAP instruments 205 Projected composition of US notified support in 2014 and ‘available’ OTDS support (excluding ACRE payments), billion US dollars 235 World cereal consumption, production, stocks and prices 243 Net barter terms of trade, selected countries, 2000–2007 250 Terms of trade, export volumes and purchasing power of exports, 1980–2004 251 The impact of trade liberalisation on agricultural production of selected country groups 263 Wheat food aid deliveries as direct transfers and wheat price (2000–2007) 300

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TABLES

Table 2.1 Change in global food prices between 2005 and the first quarter of 2008 page 30 Table 3.1 Changes in nominal prices of agricultural indices (per cent) 53 Table 3.2 Changes in nominal prices of specific agricultural products (per cent) 54 Table 3.3 Changes in nominal prices of agriculture, metals and oil (per cent) 57 Table 3.4 Real prices: US$/tonne (constant US$ of January 2008) 60 Table 3.5 World macroeconomic indicators 63 Table 3.6 Change in growth in GDP per capita during recessions (per cent) 72 Table 3.7 Changes in interest rates during recessions (per cent) 72 Table 3.8 Change in commodity prices during recessions (per cent) 73 Table 3.9 Energy, population, and GDP 76 Table 4.1 Returns on agricultural growth and poverty reduction from investments in public goods and subsidies in different phases of the Asian Green Revolution 85 Table 4.2 Rates of return on agricultural research 86 Table 4.3 Cumulative gross domestic product (GDP) gains to 2015 from 1 per cent additional growth in selected commodity group subsectors (US$ million) in Eastern and Central Africa 93 Table 4.4 Value, destination and composition of agricultural trade, 1996–2000, East and Southern Africa 93 Table 5.1 Supply balance, wheat and coarse grains, oilseeds, 2005–2007 114 Table 6.1 Characteristics of Special Report on Emissions Scenarios (SRES) scenarios 149 Table 6.2 Projected impact of climate change scenarios on the number of undernourished people in developing countries, 2020, 2050 and 2080 157 Table 8.1 EU-25 agricultural trade (2000–2006) in billion US$ 193 Table 8.2 Summary analysis of EU-applied MFN tariffs, 2006 201

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list of tables Table 9.1 Table 9.2 Table 10.1 Table 10.2 Table 10.3 Table 10.4

Costs of the main US farm subsidies, 1996–2006 and projected 2007–2012 (billion US dollars) 225 Aggregate projected outlays under the 2008 FCE Act 227 Net trade balance in selected product groups and for selected country groups, 1995–1996 and 2005–2006 246 Average change of terms of trade and effects, 2004–2006 257 Agricultural bound and MFN applied tariff rates 260 Impact of agricultural trade liberalisation on producer and consumer surplus of selected country groups 264

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ABBREVIATIONS

ACRE AEZ AGRA AIDS AMS AoA ARP ATPSM BLS c.i.f. CAADP CAP CBO CCC CFF CGIAR CIS CPI CRP CSE CTE DAC DDA DSSAT EBA EEP EIS Act EPA ESF FAC FAIR Act FAO FCE Act

Average Crop Revenue Election agro-ecological zones Alliance for a Green Revolution in Africa acquired immune deficiency syndrome aggregate measure of support Agreement on Agriculture acreage reduction programme agricultural trade policy simulation model (IIASA-)Basic Linked System cost, insurance and freight Comprehensive Africa Agricultural Development Program Common Agricultural Policy Congressional Budget Office Commodity Credit Corporation Compensatory Financing Facility Consultative Group on International Agricultural Research Commonwealth of Independent States consumer price index Conservation Reserve Program consumer support estimate consumer tax equivalent Development Assistance Committee Doha Development Agenda Decision Support System for Agro-technology Transfer Everything But Arms (initiative) Export Enhancement Program Energy Independence and Security Act Economic Partnership Agreement Exogenous Shock Facility Food Aid Convention Federal Agriculture Improvement and Reform Act Food and Agriculture Organization of the United Nations Food, Conservation and Energy Act

xiv

l ist of abbreviati ons FSRI GATT GCM GDP GHG GSE GSM-102 and -103 GSP scheme GTAP IBRD ICRC IFAD IFPRI IFS IGC IIASA IMF IPCC LAC LDC LFAs MDGs MFN MPS MT NAADS NERICA NFIDC NGO NPS support NRA ODA OECD OPEC OTDS PRSPs RRA S&D SCM SFP Single CMO SNAP

xv

Farm Security and Rural Investment Act General Agreement on Tariffs and Trade General Circulation Model gross domestic product greenhouse gas gross subsidy equivalent Export Credit Guarantee Program generalised scheme of tariff preferences Global Trade Analysis Project International Bank for Reconstruction and Development International Committee of the Red Cross International Fund for Agricultural Development International Food Policy Research Institute International Financial Statistics International Grains Council International Institute for Applied Systems Analysis International Monetary Fund Intergovernmental Panel on Climate Change Latin America and the Caribbean least-developed country less favoured areas Millennium Development Goals most-favoured nation market price support million tonnes Uganda National Agricultural Advisory Services new rice for Africa net food-importing developing country non-governmental organisation non-product-specific support nominal rate of assistance official development assistance Organisation for Economic Co-operation and Development Organization of the Petroleum Exporting Countries overall trade-distorting domestic support Poverty Reduction Strategy Papers relative rate of assistance special and differential treatment Agreement on Subsidies and Countervailing Measures single farm payments single Common Market Organisation Supplemental Nutrition Assistance Program

xvi SP SRES SSG SSM SURE TBI TRI TRQ USAID US CPI UNCTAD URAA USDA WARDA WFP WRI WTO

l ist of abbreviations Special Product Special Report on Emissions Scenarios Special Agricultural Safeguard Special Safeguard Mechanism Supplemental Revenue Assistance trade bias index trade reduction index tariff rate-quotas United States Agency for International Development US Consumer Price Index United Nations Conference on Trade and Development Uruguay Round Agreement on Agriculture US Department of Agriculture West Africa Rice Research Center, now Africa Rice Center World Food Programme Welfare Reduction Index World Trade Organization

PREFACE

The World Trade Forum series was established to help spread the conviction that a multidisciplinary approach to international trade is warranted. The twelfth World Trade Forum was held on 26 and 27 September 2008 at the World Trade Institute of the University of Bern on ‘the Food Crisis and the World Trading System’. Food security being a matter of production, availability and access (and, in the case of the needy without resources, of food aid), international trade and hence the WTO play a critical role in shaping the roadmap required to achieve a stage at which poor people will have sustainable and stable access to the most basic of all human needs. Somewhat surprisingly, not much has been written on this particular aspect, and the ongoing Doha Round negotiations have not so far made substantial progress in addressing some important food security concerns such as export restrictions and the circumvention of export competition disciplines through international food aid. The interdisciplinary debates among the participants and the lively exchanges between scholars, practitioners and government officials reflected in every chapter in this book have thus produced very valuable insights and proposals for a way forward which would not only liberalise trade in agriculture but allow for more, and more sustainable, production incentives guaranteeing more food security for the poor. Thus, we wish to thank the authors of the chapters in this book who have worked beyond the call of duty to accommodate the guidelines and suggestions of the editors. We are also grateful for the support of the Ecoscientia Foundation, which helped to make the conference a truly engaging event for everyone involved. Organising the conference required true teamwork from all those involved. Thanks are also due to Susan Kaplan, her assistant, Jane Müller, and to Sarah Woodall for preparing the manuscript. Moreover, we wish to express our gratitude to the administrative staff of the World Trade Institute, especially Margrit Vetter, Gaby Hofer and Piia Pappinen for their capable organisation of the event. This book would not have been possible without the xvii

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preface

funding of the Swiss National Science Foundation in support of the National Centre for Competence in Research (NCCR) Trade Regulation. The editors are indebted to the Director of NCCR Trade Regulation, Professor Thomas Cottier, for establishing the contact with Cambridge University Press and selecting food security as the topic of the twelfth World Trade Forum. The co-editors of this volume, Baris Karapinar and Christian Häberli, the NCCR’s Senior Researchers on agriculture, trade and development issues, are indebted to all their colleagues for their significant role in encouraging high-level participation in the twelfth World Trade Forum and for making the event an interesting one for all those who attended. Last, but not least, we wish to thank Finola O’Sullivan from Cambridge University Press for her commitment to the book project. Conceptualised as a reference volume, we hope that this book will complement and update other publications, and find an interested, yet critical readership, ready to shape the future of a new trade support system for improved food security – because food crises and hunger are problems which will not go away on their own.

1 Introduction: food crises and the WTO baris karapinar*

What may be called ‘instant economics’ has always appealed to the quickwitted layman impatient with the slow-moving economist. This is particularly so in the field of hunger and food policy. Of course, the need for speed is genuinely important in matters of food, and the impatience is, thus, easy to understand. But instant economics is also highly deceptive and especially dangerous in this field. Millions of lives depend on the adequacy of policy response to the terrible problems of hunger and starvation in the modern world. Past mistakes of policy have been responsible for the death of many millions of people and the suffering of hundreds of millions, and this is not a subject in which short-cuts in economic reasoning can be taken to be fairly costless. (Sen 1998)

In early 2008, world prices of major agricultural commodities, including wheat, rice, maize and oilseed crops reached their highest levels in nearly three decades. Stocks of the major commodities had been reduced to their lowest levels, yet food prices continued to mount, straining the budget of low income households all around the world. This led to some political tensions too – as people took to the streets in more than 30 countries, demanding their governments take action. There were even violent food riots that toppled governments, such as the one in Haiti. What is puzzling, however, is that the rising food prices caught the world by surprise. Policymakers in developed and developing countries alike appeared ill-equipped to deal with the supply shortages and the corresponding market volatility which thus turned into a real ‘food crisis’. Food crises are nothing new for the hundreds of millions of people around the world who have always suffered from chronic food shortages and malnutrition. What is new, however, is the extent to which the * Senior Research Fellow, World Trade Institute, University of Bern, Switzerland.

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phenomenon affects societies that have long taken declining food prices for granted. By the same token, the fact that the world has failed to feed its entire population in periods of huge food surpluses and relatively low prices reveals that, as Amartya Sen would argue, there is no room for ‘instant economics’ looking for a quick fix. Since Sen first analysed famines in Asia and Africa through his uniquely comprehensive approach, the political economy of food security has changed. There are new factors – such as the expansion of biofuels at the expense of food crops, market speculation and climate change, to name but a few – operating at the global level, stretching the definition of food security as a matter of ‘entitlement’ (Sen 1981). Even the definitions based on availability, access, stability and utilisation do not reflect the complexity of increasingly global food supply systems.1 Achieving food security is now a multidimensional task, involving a growing role for a competitive and effective international trading system, the integration of small-scale farms into global supply chains, investing in new technologies and input availability, and adopting environmentally sustainable farming and supply management practices. Given the new developmental challenges that contemporary societies face, addressing food security requires a new and more comprehensive policy agenda at the national and international levels. Despite decades of efforts and tremendous technological progress in a globalised economy, the task is now even bigger, not only because there are more mouths to be fed but also because of other unprecedented constraints such as the current financial meltdown and the longer term challenge of climate change. What are the potential implications of the 2008–2009 financial crisis on agricultural commodity markets? Global capital markets are now so integrated that the financial crisis, which originated mainly in the US, with the consequence of global recession, affects the macro-economic environment in which even subsistence farmers operate. Similarly, addressing the potential impacts of climate change on agriculture is a major challenge, which has led some analysts to question the world’s carrying capacity (e.g. Diamond 2005). Modelling 1

Based on the Food and Agriculture Organization of the United Nations (FAO) definition (FAO, 2002). Another definition was adopted by the 1996 Food Summit: ‘Food security, at the individual, household, national, regional and global levels is achieved when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life’ (FAO, 1996). Given their subjective nature, these definitions do not offer a framework for clearly set mandates and measurable performance benchmarks.

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studies project that climate-change-related variations in temperature, precipitation and the frequency of extreme events will have a substantial impact on agricultural production, with the potential for critically undermining food security in already vulnerable regions such as sub-Saharan Africa. Will the world be able to feed more than nine billion homines sapientes in 2050 when the major impact of climate change begins to be felt? A ‘no’ answer would clearly mean Malthus’s revenge, and a blow to the instinctive drive of the human being to innovate and adapt. But a ‘yes’ answer should immediately raise the question of how. In the context of increasing globalisation of food and agriculture, how food security is to be achieved for low income population segments is a big challenge. What is the role of international trade in this picture? Is the lack of substantial liberalisation of trade in agriculture, leading to a relatively thin world market structure, a cause of the food crisis? On the other hand, has more open trade left some developing countries vulnerable to price shocks? And if so, what would a conclusion to the WTO Doha Round bring in this respect? There are also questions about the role of small-scale farms in this context. Can or should they be integrated into global food chains, or are subsistence farming and selfsufficiency (‘food sovereignty’) the way forward? In probing the role of international trade in food security, there is an urgent need for rigorous analysis to answer these crucial questions. The WTO Ministerial Conference of July 2008 took place just after food prices had reached record high levels. Given that the fundamentals of WTO rules regulating agriculture had been designed for a period when the prices of food commodities were relatively low, the question is whether or to what extent the multilateral trading system could contribute to food security in radically different market circumstances. What is the relevance of the fundamental promise of the Doha Round, namely to drastically reduce farm support and tariffs in developed countries which had been suppressing world prices at the expense of farmers in developing countries? Can providing better market access trigger higher production in low-income countries? What would be the potential impact of the latest deal on the WTO negotiating table on those countries most adversely affected by the crisis? And what would be the consequences of the remaining loopholes in a post-Doha regulatory framework, such as the lack of real disciplines on ‘non-genuine’ food aid, export credits and export restrictions? If 2008 marked the end of the trend of declining prices of food, did it also mark the end of the Doha Round?

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This book addresses the food crisis of 2007–2008 and the multilateral trading system within a broad context of agricultural development, trade regulation, technology policy and environmental sustainability. It aims to identify and analyse the major causes and triggers of the crisis and its relationship with global trade. It is divided into two thematic sections. The first section includes five chapters written by leading economists reflecting on the structural and cyclical causes of the food crisis and its impact on poverty, while also comparing it with previous cases of rapid price changes. It also deals with the technological development and environment dimensions of food security. The second section focuses on international trade and WTO regulation. It includes six chapters written by specialists in the field of international trade. In light of the results of the WTO Ministerial Conference of July 2008, this section offers an initial assessment of the Doha ‘Development Round’. It also covers the relevant WTO jurisdiction and the agricultural legislation of the European Union (EU) and the United States (US), using as examples the impact of the Common Agricultural Policy (CAP) and the US Farm Bill 2008 on the food crisis. Finally, avoiding the shortcomings of ‘instant economics’, the concluding chapter offers carefully crafted policy recommendations.

The end of poverty versus the end of low prices of food Food crises are not new, but the political economic context in which they occur differs. In Chapter 3, Díaz-Bonilla compares various parameters of commodity market fluctuations during the early 1970s and the recent food crisis. For both periods, he teases out all major macro-economic indicators, currency and finance regimes, trade patterns, triggers and causes. He also looks at the potential implications of the current financial meltdown for the agricultural commodity markets. As such, he clearly illustrates that the context of the price shock in 1973–1974 was substantially different from the one in 2007–2008. What made the surge in the prices of food crops in 2007−2008 a ‘crisis’ is its severe impact on the daily lives of the ‘bottom billion’.2 Rising prices affect this group profoundly – as food is the most essential item in their consumption basket.3 It is now becoming clear that the chances of 2 3

The term ‘bottom billion’ was borrowed from Collier (2007). The impact of the food crisis on affluent societies, which only spend a small proportion (e.g. less than 10 per cent on average) of their income on food, is marginal, although it hits poorer segments disproportionately.

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achieving the Millennium Development Goals (MDGs) by 2015 have been set back (partly) as a result of the crisis. Provisional estimates indicate that 75 million additional people have fallen below the hunger threshold, primarily due to the food price increases (FAO 2008a). Similarly, the poverty headcount – an out-of-social-context account of poverty – is estimated to have risen. However, defining the scale of the ‘crisis’, i.e. its impact on the poor, is a complex task, requiring rigorous empirical analysis. As compared to highly aggregated cross-country studies, household surveys better capture the complexity of the phenomenon. Beyond the static and relatively straightforward assessment of the impact of prices on households with different profiles, e.g. net food buyers or net food sellers, it is crucial to shed more light on the secondary and long-term effects that high prices of agricultural commodities might have on employment, investment and consumption linkages between the agricultural and non-agricultural sectors. ‘Instant economics’ tell us that net food sellers are better off while net food buyers shoulder the burden; however, as the prices are projected to remain high, their potential impacts on farm employment, wages of unskilled or semi-skilled labourers, agricultural investment and consumption patterns need to be identified before putting in place longterm policy strategies in response to the crisis. In Chapter 2, Martin and Ivanic look at household income and expenditure patterns in nine low-income countries to assess the impact of the food crisis on different segments of the poor.4 Analysing the results of extensive household surveys, the study investigates the potential impact of different price scenarios, including the one reflecting the recent price rises, on poverty headcount and poverty gap. It clearly illustrates how the impact on poverty differs substantially at the commodity, country and household levels. It explains why the negative impact of changes in prices of certain crops is higher than that of others. It provides a numerical estimation of the secondary impact of price changes on poverty, by taking into account the potential changes in wage rates for unskilled workers. It also offers a methodological account of why some surveys in the literature draw different set of conclusions on the impact of price movements on poverty.5 The chapter concludes by making an estimation about the potential impact of the food crisis on poverty headcount and on efforts in the fight against poverty (Ivanic and Martin 2008). 4

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These countries were Cambodia, Vietnam, Bolivia, Nicaragua, Peru, Madagascar, Zambia, Malawi and Pakistan. For instance, a recent study by Aksoy and Isik-Dikmelik (2008).

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A recent FAO study looks into other dimensions of the effects of price hikes on poverty (FAO 2008a). It highlights cases where the price increases have not actually reduced cereal consumption significantly, as in Peru, where poor people adapt to change by reducing their consumption of other vital goods and services, such as education and health care, which would lead to more severe long-term consequences. The study also looks at the gender dimension, and concludes that on average, femaleheaded households both in rural and urban areas stand to lose more than male-headed households (FAO 2008b). This is mainly because femaleheaded households tend to have less access to land and hence to be poorer. Therefore they spend a greater share of their income on staple foods, resulting in a relatively more adverse welfare impact than is seen in male-headed households. Other chapters in this volume look at the secondary and long-term impacts of high food prices. For example in Chapter 5, Jones and Elasri analyse the inflationary effect of food price hikes, accounting for about three-quarters of the rise in the consumer price index in some developing countries such as China, Kenya, Pakistan and Bangladesh. Clearly this will further skew the distribution of income, to the detriment of poor households. On the other hand, the questions of whether higher prices may trigger the flow of foreign direct investment (FDI) to the agricultural sector of low-income countries, how farmers will respond to the new market circumstances, and how consumption and production patterns will change are also of crucial importance. For instance, there are recent reports that countries like South Korea, China and Saudi Arabia are increasingly interested in large-scale agricultural investment in natural resource-endowed low-income countries such as Madagascar, Mozambique, Ethiopia and Pakistan. The objective is to improve food security in the foreign investor country, which may have serious food security implications for the host country.6

Structural and cyclical factors The direction of potential long-term impacts will be strongly related to the structural and cyclical factors that led to the food crisis in the first instance. Ranging from the structure of agricultural production in developing countries to the potential impact of financial speculation on 6

For example, report by Financial Times, ‘Daewoo to Cultivate Madagascar Land for Free’ (19 November 2008).

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commodity markets, there is a need for a thorough analysis of the triggers and causes of the crisis. Such analysis should go beyond simply listing factors that might have had an impact. It should weigh the relative importance of each factor and the possible interactions between them in the wider context of globalisation in agriculture and food, driven by the increasing volume of international trade, FDI flows, vertically integrated supply systems and commodity markets (e.g. Von Braun and Díaz-Bonilla 2006; Aksoy and John 2005). What are the structural factors preventing agriculture from achieving its full growth potential in regions such as sub-Saharan Africa? Is the predominance of small farms part of the food security problem? Is there a need for a new Green Revolution, and if so, is it feasible given growing environmental constraints? How about the changes in the demand structure, driven by unprecedented economic growth in emerging economies? What is the real impact of biofuels on agricultural commodity prices? How do weather and climate-change-related factors affect the supply side? As 2008 also saw one of the biggest, if not the biggest, financial crises in recent history, to what extent has financial speculation driven prices up? Various chapters of this book address these questions extensively.

Small farm viability in a globalised economy The African continent has been witnessing hunger for decades as Adesina describes in Chapter 4. He asserts that the solution to the crisis must come from addressing the fundamental cause: low agricultural productivity. Tackling this, which requires improving small-farm productivity, he argues, would also contribute to overall economic development through forward and backward linkages (production, consumption, labour, capital and foreign currency) between the agricultural and non-agricultural sectors. However, since Johnston and Mellor (1961) identified these linkages in small-farm-dominated production systems in the early 1960s, the political economic contexts within which small farms operate have changed enormously. Whether small farms in developing countries – amounting to 500 million farms operating less than 2 hectares on average (Nagayets 2005) – have managed to keep up with the pace of this change is a crucial question. Hence, as a structural factor, is the predominance of small-scale farms part of the chronic food insecurity problem in certain parts of the world?7 7

The vast majority of around 70 per cent of the world’s poor living in rural areas relies on small-scale farming for their livelihoods (IFAD, 2001).

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A recent debate on the role of small farms in economic development and poverty alleviation in the age of globalisation is relevant in this context. It takes place between two competing camps: the ‘neo-populist small-farm orthodoxy’ school and the ‘agro-pessimist’ ‘rethinking rural development’ school. The former relies on the old paradigm of small-farm efficiency in arguing that pro-poor growth depends on family farms, while the latter takes a sceptical view of the future viability of small farms, emphasising the role of non-agricultural activities in poverty alleviation and economic development. The ‘small-farm’ school, led by scholars like Lipton and Hazell, argues that since small farms dominate the rural space in terms of the proportion of agricultural value-added, area and workforce, their resilience and persistence can be taken as an indication of their present and future viability (Lipton 2005). The members of this school of thought have long argued that small farms are advantageous in the early stages of development, since their labour-related transaction costs are low (Lipton 2005). Another advantage of small family farms is their natural hedging against food price shocks. The impact of a food price shock affects them through their net trade status in food, not their much larger total production status. The so-called inverse relationship between farm size and productivity constitutes the theoretical foundation of this argument.8 The neopopulist school takes an optimistic approach in relation to the future viability of small farms and envisages that they can still play a major role in poverty alleviation (Hazell and Diao 2005). The ‘rethinking rural development’ school, on the other hand, takes a pessimistic view of the role of small farms in fighting poverty. Its proponents question the economic viability of small-scale farming – as they look at the declining profitability of the sector as a whole (Ashley and Maxwell 2001). They also observe major trends in global food chains, and claim that small farms are not competitive at the global level (and are therefore too expensive for their customers, including other rural and urban poor). Higher transaction costs and institutional development failures disconnect 8

The theoretical foundation of neo-populism was established by Chayanov in the 1910s. It was based on the idealisation of the dual character of small-scale farming. Combining the features of both entrepreneur and labourer, it was argued that small-scale family production was the most efficient form in agriculture. The idea of an inverse relationship between farm size and productivity was one of the fundamental backbones of this theory. It was argued that family producers had the ability to reduce their consumption, increase their productivity and re-allocate their land and labour endowments whenever necessary (Chayanov 1966).

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small farms from dynamic markets (Kydd 2002; Kydd and Dorward 2001). Hence, agro-pessimists suggest that the way forward is diversification from agriculture to non-agricultural activities for the bulk of small farms and thus the enhancement of scale-efficiency and market integration for those remaining in agriculture (Ashley and Maxwell 2001). Rather than prioritising agriculture, they argue, investing in education, training activities, rural tourism, and transport and communication infrastructure to ease the labour transition out of agriculture would be a structural solution that would alleviate poverty and thereby ensure food security.

Lack of Green Revolutions There have been repeated calls for a new Green Revolution to promote small farms and alleviate poverty and hunger in low-income countries, particularly those located in sub-Saharan Africa. It is true that the Green Revolution has contributed to alleviating poverty and hunger for hundreds of millions of people, mainly in Asia. However, it remained technically limited – as it left large numbers of poor farmers located in dry agroecological regions untouched (Hazell and Ramasamy 1991).9 Both poverty and malnutrition are prevalent in these regions, which are now also facing the potentially negative impacts of climate change. In light of the food crisis, there is no doubt that the productivity in staple foods needs to be improved in these areas; however, whether the Green Revolution offers the right technological and institutional framework is contentious. It has been argued that the Green Revolution was limited in its institutional design – as its ‘top-down’ approach did not equip it to address social, economic and environmental variations at the local level. Its state-led centralist approach to scientific research and technological innovation seems to be no longer feasible. In many developing countries, public research institutions, which were never designed to be competitive, find it increasingly difficult to obtain adequate resources and expertise to innovate in a rapidly developing field of technology. They lack the market knowledge and entrepreneurial drive to respond to today’s world of extremely diversified and sophisticated agricultural markets. Furthermore, the original design of these institutions, based on the conventional neo-classical assumption that there is a linear path from investment and research to innovation and its subsequent adoption by farmers, has been challenged 9

Mainly in sub-Saharan Africa, but also in very large areas of Asia, there are now an estimated one billion people living in rain-fed dry and cold regions (Dixon et al., 2001).

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(Hall et al. 2001). Hence, whether the institutional structure of the Green Revolution is capable of dealing with the new challenges that small farmers in developing countries now face is highly questionable. The fact that the new technologies are increasingly sophisticated, and that scientific research and trials require substantial investment, is excluding many developing countries with limited resources to spend on R&D. The total spending on agricultural research in developing countries was around US$ 14 billion in 2000, as compared to US$ 23 billion in developed countries (Alston and Pardey 2006). The spending of developing countries has been rising at the aggregate level, but only a few relatively advanced countries account for this overall trend. Four major developing countries – India, China, Brazil and South Africa – account for more than half of the total spending by developing countries on public agricultural research. By contrast, sub-Saharan Africa has a dismal record. Africa’s total public spending increased from US$ 1.37 billion in 1991 to US$ 1.46 billion in 2000, a growth of less than 1 per cent per annum. Even this low level of growth was mainly due to the efforts of a few relatively large countries, such as South Africa, without which the total level of spending would have declined significantly (Alston and Pardey 2006). Looking at this picture, some experts even argue that the increasing scientific gap and the dominance of the private sector are creating ‘scientific apartheid’ (Serageldin 2001). To address this problem, there is an urgent need for a substantial shift in the way that agricultural R&D policies and priorities are formulated in lowincome countries facing chronic food security problems (Karapinar and Temmerman 2008). In particular, Adesina, in Chapter 4, outlines how the ideals of the Green Revolution can be reformulated to overcome some of its institutional and technical weaknesses in the context of Africa. Given that the continent has a diverse set of agro-ecologies and cropping systems, he explains why there is a need for ‘rainbow green revolutions’ and ‘evergreen revolutions’ that combine increased productivity for diverse crops with greater emphasis on a farming systems approach, farmer participation and local adaptation and management by farmers (Swaminathan 2006). He discusses some small-scale but promising success stories on the path towards achieving such ‘rainbow revolutions’.

Climate change and food security All other factors being equal, the present challenge of achieving food security is considerably greater in view of the potential impact of climate change on

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agriculture. Simulation models indicate that climate-change-related variations in temperature and precipitation will significantly alter cropping patterns and levels of productivity. More importantly, the frequency and magnitude of extreme events, such as heat waves, droughts and floods during specific crop development stages, are expected to intensify, increasing the risk of production failures which will create additional volatility. Hence there is an urgent need for designing effective adaptation strategies that would lessen the future severity of climate change impacts on food security (Easterling et al. 2007). Modelling studies combining biophysical and socioeconomic variables suggest that low-income developing countries will be affected most adversely (Fischer et al. 2005). Based on higher impact scenarios, crop yields will decrease by up to 30 per cent in Africa and some parts of Asia (Parry et al. 2004). Even the potentially beneficial effect of higher carbon dioxide concentrations is not likely to offset the yield losses occurring as a result of higher temperatures and water deficiencies (Parry et al. 2004). In Chapter 6, Schmidhuber and Matuschke focus on the potential impact of climate change on food security. Using different scenarios, they explain the process through which the projected changes in crop patterns, and changes in yields and agricultural gross domestic products (GDPs), could influence the number of people facing food insecurity and undernourishment (Schmidhuber and Tubiello 2007). They also underline that mainly arid and semi-arid agroecological zones, which already suffer from the current food crisis, will be negatively affected by the impacts of climate change. As for the potential implications of climate change in relation to food markets, although estimations are not that accurate, it is likely that it would raise food prices in the long term (Fischer et al. 2005). Similarly, trade patterns and volumes might be affected too. Given that the impact of climate change on yields, cropping patterns and agricultural GDPs will be unevenly distributed across the world, the volume of agricultural trade is likely to grow, especially in cereals, between regions located in higher latitudes (mostly developed countries) and those located in low latitudes and dry agro-ecologies (mostly low-income countries). Trade volumes are likely to be more volatile as a result of a higher frequency of extreme events causing unexpected damage in the different segments of the global food system, creating periodic shortfalls, which the international trading system would need to be responsive to.

Market trends and biofuels Going back to the immediate factors triggering the food crisis in global markets, in Chapter 5 Jones and Elasri analyse the role of changing diets,

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urbanisation, economic growth and expanding populations, which increase demand for food and feed in developing countries; and in Chapter 6, Schmidhuber and Matuschke look at other swing and shift factors such as the effect of weather variability on food supplies. Chapter 5 also presents the recent trends and future projections of stock-to-use ratios, and provides information on the ten-year outlook horizon. It should be noted that these projections will need to be reinterpreted in light of the 2008 financial meltdown and its recessionary impacts on the world economy. Price projections factoring in the impacts of the recession are likely to be lower than currently forecast. Chapters 5 and 6 also address the fast growing demand for biofuel feedstocks, which, as the largest source of growth in demand, is a strong factor underpinning the upward shift in agricultural commodity prices. However, it should be noted here that there is no consensus on the extent of the role of biofuels in the price surge. For example, a recent report by the World Bank estimated that 75 per cent of the price increase is due to the combination of a sharp increase in demand for biofuels and related factors such as low grain stocks, changes in cropping patterns, speculation and export bans (Mitchell 2008). An International Monetary Fund (IMF) study also found the impact of biofuels to be significant, without specifying how significant it was (Johnston 2007). On the other hand, a recent UNCTAD report argued that the extent of the contribution of biofuels to the price increases was not clear, given that only a fraction of global wheat production (0.6 per cent) is used for biofuels, and that rice is not used for biofuel production at all, making it difficult to establish a significant linkage between biofuels and the boom in wheat and rice prices (UNCTAD 2008). In any case, the 2008 financial meltdown and the decline in oil prices led to the collapse of many ethanol firms in the US, which means that it is now difficult to predict the short-term impact of biofuels on agricultural commodity prices.

International trade and food security Achieving food security in low-income countries, while taking part in increasingly global food and agricultural markets, is a big challenge. How does international trade affect their food security, given that agricultural markets are heavily distorted? Is the lack of substantial trade liberalisation in agriculture a cause of the food crisis? What would be the effect of more liberal trade on different countries with diverse trade profiles? On the other hand, has more open trade left some developing countries,

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which had unilaterally opened their borders, vulnerable to price shocks? What is the role of the multilateral trading system and the WTO in promoting food security? Is there a need for a new and wider agenda in the WTO with respect to the policy interventions that exacerbate high prices? By focusing on international trade and WTO regulation and jurisdiction, the second section of the book addresses these questions. Agricultural markets remain heavily distorted both at the national and international levels. As Anderson underlines in Chapter 7, in which he analyses new empirical findings from a World Bank research project involving 75 countries, distortions in the agricultural sector accounted for approximately 60 per cent of the global welfare cost of all distortions to goods trade in 2004. Given that the sector contributes only 3 per cent of global GDP and 6 per cent of global trade, the extent of policy distortions hampering trade and economic growth in the agricultural sector becomes obvious. As Anderson points out, this is particularly relevant in relation to poverty – as three-quarters of the world’s poor depend on agriculture for their livelihood. Thus, Chapter 7 attempts to identify the role that international trade would have played in food security in a context in which agricultural markets are free from distortions. At the country level, too, there is no simple answer to the question of whether more liberal international trade in agriculture helps or hinders food security. A rigorous analysis by Diaz-Bonilla et al. (2000) asserted that there is a need for more sophisticated categories than the existing categories of developing countries, least-developed countries (LDCs) and net food-importing developing countries (NFIDCs) to better capture the relationship between international trade and food security. The study suggested that the category of ‘developing countries’ is too general to be meaningful; similarly the classification of NFIDCs is imprecise given that more than a third of these countries are not trade-stressed. Hence, it offered a typology involving 12 different categories of countries, such as tradestressed countries (those whose food imports require over 20 per cent of their total export earnings), food insecure countries with an urban profile, high-consumption and trade-stressed food insecure countries (those combining high levels of average calorie consumption with a substantial level of trade stress), high-consumption and trade-stressed food neutral countries, net food importing countries with a dominant tourism industry, and food insecure countries which are neither LDCs nor NFIDCs. It is clear that the impact of further trade liberalisation would vary substantially based on these profiles at the country level.

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The most trade-vulnerable countries in this regard, however, are those suffering from a combination of the high prevalence of malnutrition, oil dependence, trade stress and high current account deficits. For instance, FAO studied a sample of 86 countries and found that the level of increase in cereal import bills would amount to more than 2 per cent of GDP in 14 countries in its sample. Countries, such as Jordan, Liberia, Republic of Moldova and Zimbabwe, which already have large current account deficits are increasingly vulnerable (FAO 2008b), especially in a global environment of financial crisis. Against this background, Herrmann and Peters, in Chapter 10, look at the economic implications of the food crisis for developing countries. Depending on their trade structures, terms of trade and their supply capacities, the chapter analyses whether exporting developing countries have actually benefited, while importing countries have actually lost considerably as a result of the price hikes.

The end of the Doha ‘Development’ Round? The breakdown in the Doha Round Negotiations of July 2008 came at a time when the immediate impact of the food crisis was being felt. This raised questions as to whether the Agreement on Agriculture (AoA), or the mandate of the Doha Development Round in general, having been designed for a period of relatively low prices of food (including food dumping), would be able to offer an effective legal framework for global trade in radically different market circumstances. After all, one of the fundamental premises of the Doha Round was to eliminate farm support in developed countries, which had been suppressing world prices. Although estimates varied significantly, the downward impact of the Organisation for Economic Co-operation and Development (OECD) domestic support measures on world prices was calculated to be less than 10 per cent, which was way below the recent price spikes.10 Even a 10 per cent rise, as Martin and Ivanic show in this book, would lead to a substantial negative impact on poverty, let alone the detrimental effect of quadrupling prices as experienced recently with some food commodities such as rice. So the question is whether the fundamentals of the Doha Development Agenda were wrong, or whether WTO rules should be redesigned to make them operable in an era of high agricultural prices. 10

For instance, Dimaranan et al. (2003), estimated that the price impact would be 3.5 to 5 per cent for major agricultural crops such as wheat and oilseeds. Anderson et al. (2006) estimated the prices of primary agricultural goods would rise by 5.5 per cent. However, the most recent estimates that Anderson presents in Chapter 7 are much lower.

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What are the potential implications of further trade liberalisation in terms of overall welfare gains, poverty and food security? In Chapter 7, in a review of recent modelling studies, Anderson highlights that removing the remaining market distortions would bring a total welfare gain amounting to US$ 168 billion per year (as of 2004, in 2004 US dollars). He also analyses how developing economies would benefit proportionately more than developed countries if domestic and international market distortions are removed. Given the importance of the agricultural sector to developing countries in general, and to poor households in particular, the vast majority of gains in poverty alleviation and overall welfare for developing countries would arise from the global reform of agriculture and food policy. On the other hand, rich farm households in developed countries, especially those specialising in highly protected and subsidised commodities such as rice, sugar, cotton and dairy produce, are the main beneficiaries of existing trade and agricultural support policies in developed countries (Hertel et al. 2006). Although relatively smaller farm households with more diversified farming activities would be affected marginally by trade liberalisation, these specialised big farms would lose substantially, which explains why they tend to form lobbies assembling strong opposition against multilateral trade liberalisation. In Chapter 9, Orden illustrates how powerful these interest groups are in shaping domestic support and trade policies in the US. It proves that the decisive factor in formulating trade policy is the political economy of how vested interests seek to maintain existing policies from which they derive rents. The negotiations of July 2008 were politically charged as usual, yet it was not surprising to observe that both the opponents and the proponents of further liberalisation of agricultural markets used the recent food crisis to justify or strengthen their positions (FAO 2008c). Those arguing for further liberalisation suggested that the combination of artificially low world prices and high protection in developed countries had hindered developing countries from investing in higher production and productivity in agriculture, which is also the main reason why these producers now lack the capacity to respond to higher prices. On the other hand, those arguing against further liberalisation suggested that lowering border protection and agricultural support would lead to additional increases in prices which will hurt consumers in developing countries even more. In the end, the negotiations collapsed, apparently because of a deadlock on the Special Safeguard Mechanism designed to prevent import surges. This was rather ironic – as it came at a time when almost

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all developing countries had dropped or eliminated their applied tariffs, yet were facing difficulties in importing food crops. In Chapter 12, Häberli offers a comprehensive analysis of the relevant WTO law and policy, covering provisions both in the Uruguay Round and the current Doha Round. In a trade regulatory context, his chapter assesses the potential impact of the three pillars – market access, domestic support and export competition – on food security. It explains why the results of the Uruguay Round were a step in the right direction, without actually changing market access conditions in practical terms. More importantly, he analyses the proposal of July 2008 – the final text on the Doha negotiating table – in the context of the food crisis. He finds several key elements of the text to be vague, or even missing, especially in relation to disciplines on food aid and biofuels. For instance, he underlines that there is almost no regulation on export restrictions, imposed by many countries during the crisis, and which are effectively a major threat to food security in NFIDCs. These export restrictions, beyond their immediate effects, also undermine trust in the international trading system in general. The chapter outlines the contribution that more liberalised trade, regulated by an effective multilateral trading system, could make towards avoiding new food crises in the future. There is no consensus, however, on the role of liberal trade in food security. At the height of the crisis in May 2008, the French Agriculture Minister declared that free trade was not an answer to the crisis and that the EU should not yield to pressure from the WTO. He claimed that the CAP represents the ‘cornerstone of the continent’s food security’ and argued for the adoption of the CAP model in other parts of the world, including developing countries.11 The Minister did not mention, however, how such a model costing more than 40 billion euros annually could be afforded by developing countries. Yet these remarks highlighted an important stream of policy discourse against liberalisation of agricultural trade within the EU, albeit the view was not shared by all Member States. In Chapter 8, O’Connor analyses the CAP in the context of the food crisis. From a market access perspective, he assesses the process of CAP reform and identifies the market control mechanisms that it still retains. He mainly focuses on the remaining policy tools of export prohibitions or restrictions and special safeguards. The chapter then assesses the 11

These comments were in the headlines. See for example, The Times, 15 April 2008, ‘France’s Answer to Global Food Crisis is EU Protectionism’. The New York Times, 20 May 2008, ‘Rising Food Prices Sharpen a European Debate’.

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potential implications of EC trade policies in relation to food security in low-income countries. This book also addresses the implications of domestic support policies in developed countries in the context of the food crisis. The main focus here is on US farm policies which exemplify a case of a high level of tradedistorting domestic support. In Chapter 9, Orden examines the new US Farm Bill, ‘the Food, Conservation and Energy Act of 2008’, in light of current and potential WTO constraints on domestic support to agriculture. He explains why the food crisis that strained the global food system and prompted defensive policy reactions among exporters and importers worldwide had only modest effects on the commodity support provisions of the new US Farm Bill. His chapter underlines the political economic factors explaining the relatively weak trend towards less distorting decoupled policy instruments. It also provides an assessment of projected US support until 2014, suggesting that if the predicted high world prices materialise, under the Uruguay Round, there might be no additional WTO constraint on US subsidy policies. However, the WTO disciplines might lead to some significant repercussions if the proposed Doha Round modalities of July 2008 were agreed upon. Beyond the impact of domestic support and market access policies, the food crisis has also highlighted a fundamental weakness of one of the direct policy tools used by developed countries: food aid. Despite a chorus of calls by bodies such as the World Bank, FAO and the World Food Programme for additional food aid to those in need of urgent supplies, the level of food aid actually dropped in 2006 and 2007. Looking at the recent trends in volume, one observes a staggering negative correlation between food prices and actual amount of food aid delivered. Häberli in Chapter 12 highlights this trend as an indication of a rather ‘non-genuine’ nature of food aid, which is often used to dump the surpluses of developed countries in lowincome countries, to the detriment of domestic production. This argument is in line with the fact that the US, for instance, is reluctant to offer parts of its food aid commitments in cash rather than in kind. Orden mentions in Chapter 9 that the US approach to international food aid is evidently different from the one it takes when providing food aid to the domestic poor. As such, the food crisis has highlighted, once again, the relevance of the question whether food aid is part of the problem or part of the solution to the issue of food security. Yet it is clear that there should be more effective regulation of food aid, reducing its distorting impacts on trade and domestic production. Finally, moving from food aid to ‘aid for trade’ in this context, in Chapter 11 Prowse bases her policy advice and prescriptions on the

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rationale that gave rise to the ‘aid for trade’ (AFT) initiative (Prowse 2006; Hoekman and Prowse 2009). She explains the two distinct purposes in the allocation of increased resources to AFT. She underlines that there had been significant underinvestment by donors (both bilateral and multilateral), in trade, growth and the productive sectors of the economy, including agriculture. However she also stresses that international structures themselves need additional support and strengthening to be able to provide global public goods. Her chapter also looks at addressing preference distortions through increased AFT. It underlines that adjustment to higher food prices would imply a policy prescription of trade reform and facilitation of agricultural trade in developing countries, which, in turn, would require an assessment of the fiscal and macroeconomic implications and appropriate support responses (including safety nets). It finally addresses the question whether and to what extent the increase in food prices provides an opportunity for the global community (donors both traditional and non-traditional) to refocus on investment in agriculture and social protection where there has been a long-term problem of underinvestment.

Looking forward For decades, millions of poor people have been suffering from malnutrition and hunger. However, the rising food prices in 2007–2008 caught the world by surprise. Although prices have fallen from their peaks in early 2008, the situation has become even worse for some countries due to the recessionary impact of the financial crisis, pushing unemployment up, reducing remittances and slowing the export-oriented nonagricultural sectors (World Food Programme 2008). Now it is time for policy makers to rethink their agricultural and trade policies. They have to face the colossal task of reversing the decades-long neglect of rural and agricultural development in low-income countries, revitalising agricultural research and extension services, integrating small farms into global food supply systems, and in addition, addressing new environmental challenges, such as climate change, in a sustainable manner. Even though a successful completion of the Doha Round may provide additional incentives for competitive farmers to produce more food, a comprehensive reform of the multilateral trade system in a way that will address food security requires more than just the completion of the Round. Hence, the current stalemate in negotiations provides the opportunity for a new look at what is on the table. Although the mandate of the

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WTO is trade liberalisation and not the promotion of food security as such, in the context of the food crisis, the ways in which what would truly be a ‘Development Round’ could benefit the poor and the hungry need to be explored, which is what this book attempts to do. References Aksoy, M. A. and Beghin, J. (eds.) 2005. Global Agriculture Trade and Developing Countries. Washington, DC: World Bank. Aksoy, M. A. and Isik-Dikmelik, A. 2008. ‘Are Low Food Prices Pro-poor? Net Food Buyers and Sellers in Low-income Countries’, Policy Research Working Paper, No. 4642, World Bank. Alston, J. M. and Pardey, P. G. 2006. ‘Developing-country Perspectives on Agricultural R&D: New Pressures for Self-reliance?’, in Pardey P. G., Alston J. M. and Piggott R. R. (eds.), Agricultural R&D in the Developing World: Too Little, Too Late? Washington, DC: International Food Policy Research Institute. Anderson, K., Martin, W. and van der Mensbrugghe, D. 2006. ‘Distortions to World Trade: Impacts on Agricultural Markets and Farm Incomes’, Review of Agricultural Economics 28:168–94. Ashley, C. and Maxwell, S. 2001. ‘Rethinking Rural Development’, Development Policy Review 9:395–425. Chayanov, Aleksandr V. 1966. in Thorner, D., Kerblay, B. and Smith, R. E. F. (eds.), The Theory of Peasant Economy. Homewood, IL: Irwin. Collier, Paul 2007. The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It. Oxford: Oxford University Press. ‘Daewoo to Cultivate Madagascar Land for Free’, Financial Times, 19 November 2008. Diamond, Jared 2005. Collapse. New York: Viking. Díaz-Bonilla, E., Thomas, M., Robinson, S. and Cattaneo A. 2000. ‘Food Security and Trade Negotiations in the World Trade Organization: A Cluster Analysis of Country Groups’, International Food Policy Research Institute (IFPRI), TMD Discussion Paper, No. 59. Dimaranan, B., Hertel, T. and Keeney, R. 2003. ‘OECD Domestic Support and the Developing Countries,’ Paper for the UNU/WIDER Project on the Impact of WTO on Low-income Countries, GTAP Center, Purdue University. Dixon, J., Fulliver, A. and Gibbon, D. 2001. Farming System and Poverty: Improving Farmer’s Livelihoods in a Changing World. Rome/Washington, DC: FAO/World Bank. Easterling, W. et al., in Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press, pp. 273–313.

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Fischer, G., Shah, M., Tubiello, F. N. and Van Velhuizen, H. 2005. ‘Socio-economic and Climate Change Impacts on Agriculture: An Integrated Assessment, 1990–2080’, Philosophical Transactions of the Royal Society B: Biological Sciences 360: 2067–83. Food and Agriculture Organization (FAO) 1996. Rome Declaration on World Food Security and World Food Summit Plan of Action. World Food Summit 13–17 November 1996, Rome. Food and Agriculture Organization (FAO) 2002. The State of Food Insecurity in the World 2001. Rome: Food and Agriculture Organization of the United Nations. Food and Agriculture Organization (FAO) 2008a. ‘Assessment of the World Food Security and Nutrition Situation’, Committee on World Food Security, 14–17 October 2008, Rome. 34th Session Report. Food and Agriculture Organization (FAO) 2008b. ‘Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required’, High-level Conference on World Food Security: The Challenges of Climate Change and Bioenergy, 3–5 June 2008, FAO, Rome. Food and Agriculture Organization (FAO) 2008c. ‘The Breakdown of the Doha Round Negotiations: What Does It Mean for Dealing with Soaring Food Prices?’, Economic and Social Perspectives Policy Brief 3. ‘France’s Answer to Global Food Crisis is EU Protectionism’. The Times, 15 April 2008. Hall, H. J., Sivamohan, M. V. K., Clark, N., Taylor, S. and Bockett, G. 2001. ‘Why Research Partnerships Really Matter: Innovation Theory, Institutional Arrangements and Implications for the Developing New Technology for the Poor’, World Development 29: 783–97. Hazell, P. B. R. and Ramasamy, C. (eds.) 1991. The Green Revolution Reconsidered: The Impact of High-Yielding Rice Varieties in South India. Baltimore: Johns Hopkins University Press. Hazell, Peter and Diao, Xinshen. 2005. ‘The Role of Agriculture and Small Farms in Economic Development’, prepared for ‘The Future of Small Farms’ Workshop, Wye, UK, 26–29 June 2005. Hertel, T. W., Keeney, R., Ivanic, M. and Winters, L. A. 2006. ‘Distributional Effects of WTO Agricultural Reforms in Rich and Poor Countries’, World Bank Policy Research Working Paper, No. 4060. Hoekman, B and Prowse, S. 2009 ‘Economic Policy Responses to Preference Erosion: From Trade as Aid to Aid for Trade’, in Hoekman, B., Martin, W. and Braga, C. A. (eds.) Trade Preference Erosion Measurement and Policy Response. Palgrave Macmillan and World Bank. International Fund for Agricultural Development (IFAD) 2001. Rural Poverty Report 2001: The Challenge of Ending Rural Poverty, available at http:// www.ifad.org/poverty/ (accessed May 2004). Ivanic, M. and Martin, W. 2008. ‘Implications of Higher Global Food Prices for Poverty in Low-Income Countries’, Policy Research Working Paper, No. 4594, World Bank.

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Johnston, Simon 2007. ‘The (Food) Price of Success’, Finance & Development, 44, No. 4 December. Washington, DC: The International Monetary Fund. Johnston, Bruce F. and Mellor, John W. 1961. ‘The Role of Agriculture in Economic Development’, The American Economic Review 51: 556–93. Karapinar, B. and Temmerman, M. 2008. ‘Benefiting from Biotechnology: Pro-poor IPRs and Public Private Partnerships’, Biotechnology Law Report 27:189–202. Kydd, Jonathan 2002. ‘Agriculture and Rural Livelihoods: Is Globalisation Opening or Blocking Paths out of Rural Poverty?’, Overseas Development Institute, Agricultural Research and Extension Network Paper, No. 121. Kydd, Jonathan and Dorward, Andrew 2001. ‘The Washington Consensus on Poor Country Agriculture: Analysis, Prescription and Institutional Gaps’, Development Policy Review 19: 467–78. Lipton, Michael 2005. ‘The Family Farm in a Globalizing World: The Role of Crop Science in Alleviating Poverty’, International Food Policy Research Institute, 2020 Discussion Paper, Publication No. 40, Washington, DC. Mitchell, Donald 2008. ‘A Note on Rising Food Prices’, Washington, DC: World Bank. Nagayets, Oksana 2005. ‘Small Farms: Current Status and Key Trends’, Information Brief Prepared for ‘The Future of Small Farms’ Research Workshop, Wye College, UK, 26–29 June 2005. Parry, M. L., Rosenzweig, C., Iglesias, A., Livermore, M. and Fischer, C. 2004. ‘Effects of Climate Change on Global Food Production under SRES Emissions and Socio-economic Scenarios’, Global Environmental Change 14: 53–67. Prowse, Susan 2006. ‘Aid for Trade: Increasing Support for Trade Adjustment and Integration – a Proposal’, in Evenett, S. and Hoekman, B. (eds.), Economic Development and Multilateral Trade Cooperation. Palgrave Macmillan and World Bank. ‘Rising Food Prices Sharpen a European Debate’, The New York Times, 20 May 2008. Schmidhuber, J. and Tubiello, F. N. 2007. ‘Global Food Security under Climate Change’, Proceedings of the National Academy of Sciences of the United States of America 104: 19703–08. Sen, Amartya 1998. ‘Food, Economics, and Entitlements’, in Eicher, C. K. and Staatz J. M. (eds.), International Agricultural Development. Baltimore/ London: Johns Hopkins University Press. –––1981. ‘Ingredients of Famine Analysis: Availability and Entitlements’, Quarterly Journal of Economics 96: 433–64. Serageldin, I. 2001. ‘Changing Agendas for Agricultural Research’, in Alston, J. M., Pardey, P. G. and Taylor, M. J. (eds.), Agricultural Science Policy: Changing Global Agendas. Baltimore: Johns Hopkins University Press. Swaminathan, M. S. 2006. ‘An Evergreen Revolution’, Crop Science 46: 2293–303. UNCTAD 2008. ‘Addressing the Global Food Crisis: Key Trade, Investment and Commodity Policies in Ensuring Sustainable Food Security and Alleviating

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Poverty’, High-level Conference on World Food Security: the Challenges of Climate Change and Bioenergy, Rome, 3–5 June 2008. World Food Programme 2008. Available at www.wfp.org (accessed December 2008). von Braun, J. and Díaz-Bonilla, E. 2006. ‘Globalization of Agriculture and Food: Causes, Consequences, and Policy Implications’, in Von Braun, J. and Díaz-Bonilla, E. (eds.), Globalization of Food and Agriculture and the Poor. New Delhi: Oxford University Press.

PART 1 Economics of the food crisis

2 The food price crisis, poverty and agricultural trade policy will martin and maros ivanic* Introduction Assessing the impacts of changes in food prices on poor people and identifying appropriate policy responses are vitally important because the poorest households spend three-quarters of their budget on food and are therefore particularly vulnerable to increases in food prices. Further, in poor countries, there is no guarantee that increases in the prices of staple foods will reduce poverty even among farmers – many farmers consume much or all of their staple food output and are net buyers of food. At the same time, prices that are too low may provide insufficient incentives for food production and too little income for farmers who obtain a large share of their income from sales of food. The impacts of food price changes on poverty depend on the distribution and relative intensity of net buyers and net sellers of food among lowincome households and not just on whether net-buying or net-selling households predominate (Aksoy and Isik-Dikmelik 2008). While the accumulated evidence that higher prices of staple foods increase poverty in the short run is now very substantial (see, for example, Ravallion 1990; Warr 2005; Asian Development Bank 2008; Demombynes et al. 2008; Wodon and Zaman 2008), increases in at least some food prices may reduce poverty by transferring income to poorer households. The overall effect may also differ considerably between countries depending upon which products poor households buy and sell and the indirect impacts through changes in wage rates for unskilled labour. Because of the counteracting impacts of higher food prices on the welfare of different households, the impacts of changes in food prices on poverty can only be determined empirically. A rigorous analysis of the

* Will Martin, Lead Economist, World Bank, Washington, DC, USA. Maros Ivanic, Lead Economist, World Bank, Washington, DC, USA.

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impacts of higher food prices on poverty requires detailed survey data covering household income and expenditures by commodity. Once the impacts of price changes on poverty are understood, we can begin to understand how policy changes might affect poverty. A key question is whether the conventional wisdom in favour of relatively liberal trade policies for agriculture needs to be reconsidered in light of the impacts of food price changes on poverty. To address the questions raised above, we first consider the results from some of our recent work on the impacts of food prices on poverty in nine low-income countries. We then consider why the results may differ from those of other studies. Finally, we consider the approaches to policy formulation proposed by economists and international agencies, and their potential contribution to exacerbation or amelioration of the problems highlighted in the current food price crisis.

Impacts of food price changes on poverty in poor countries In a recent empirical analysis (Ivanic and Martin 2008) we used surveys with detailed information on household consumption and production of major agricultural staples. We obtained this information from surveys in nine lowincome countries: Bolivia, Cambodia, Madagascar, Malawi, Nicaragua, Pakistan, Peru, Vietnam and Zambia. The staple commodities we considered were maize, wheat, dairy products, rice, sugar, beef and chicken. In our analysis, we used the standard, one-dollar-a-day definition of poverty as reported by the World Bank’s World Development Indicators. We applied these poverty rates to our household data to find the level of household income in the local currency in our sample consistent with the reported poverty rate. In Figure 2.1, we verify that rural poverty rates were higher than urban poverty rates in all of our sample countries except Zambia, where urban poverty was marginally higher than rural poverty. Having calculated sales and purchases of staple food and sales of labour for each household in our survey data, we examined: (i) the direct impact of increases in the price of each staple food on poverty in each country as a basis for assessing the impacts of different changes in the prices of these commodities; (ii) the direct impacts plus the indirect impacts through effects of commodity prices on wages; and (iii) the total impact on poverty of the recently observed increases in food prices.

90 80 70 60 50 40 30 20 10 0

27

Average

Zambia

Vietnam

Peru

Pakistan

Nicaragua

Malawi

Madagascar

Cambodia

Rural Urban National

Bolivia

Poverty rate (in percentage points)

food price crisis, poverty and agricultural policy

Countries included in our sample

Figure 2.1. Poverty rates in rural and urban areas

To obtain a guide to the direction and magnitude of the impacts of changes in food prices, we first considered the impact of a 10 per cent rise in the price of each staple food item, and the entire set of commodities, on each household. We estimated the first-order impacts of price changes on each household’s income and the cost of its consumption basket. We then calculated the change in its welfare and, hence, the changes in poverty rates and poverty gaps. We considered three possible types of impact of commodity prices on wages paid to unskilled workers: no impacts at all; impacts when labour is completely mobile between agricultural and non-agricultural sectors; and impacts with restricted mobility of labour between agricultural and non-agricultural sectors. Where impacts on wage rate were considered, we used a single-country version of the Global Trade Analysis Project (GTAP) model to estimate the Stolper– Samuelson effects of changes in food prices on unskilled wage levels and applied those changes to households’ initial sales of labour. Where labour market segmentation was assumed, we used an elasticity of transformation estimated for China, an economy in which there are probably greater barriers to urban–rural mobility than in many others. We first examined the impacts of a 10 per cent increase in the price of each commodity on poverty rates and poverty gaps. Our results suggested that increases in the prices of most of these food staples generally increase poverty. However, there were exceptions, as noted below. Overall, the impact of a 10 per cent rise in the prices of

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all commodities brought about an average increase in overall poverty of 0.4 percentage points. Urban poverty rises by 0.6 percentage points, while rural households experience an increase of 0.3 percentage points. Figure 2.2 shows changes in level of poverty for three cases that highlight some key impacts of food prices, which were identified in this work. The typical adverse impact of higher prices for staple foods that are more important in consumption than in the net sales of the poorest households is illustrated by the case of rice in Cambodia. One important exception – the existence of ‘luxury’ food items that tend to be produced and sold by poor households, but little consumed by them – is apparent in the case of beef. Another important exception is the staples that are extensively produced and sold by poor rural households. This is illustrated by rice in Vietnam, where many poor households are net sellers and both rural and national poverty rates fall when prices rise. The case of Nicaragua shows that poor households may be net purchasers of a number of staple foods, making them vulnerable to price increases in a range of these commodities. Figure 2.3 compares poverty impacts under our three different labour market assumptions. Adding impacts through unskilled wage rates with an integrated labour market benefited many households, mainly urban ones, and lowered the overall negative impact of food price rises. With a segmented labour market, more of the benefit of higher wages remained in rural areas and the benefits of higher wages for reduction of urban poverty were reduced, but the overall magnitude of the poverty impacts was little affected. Finally, Table 2.1 shows our assessment of the potential impacts on poverty of the changes in world food prices between 2005 and the first quarter of 2008. After translating their impacts into changes in real prices at the national level using data on exchange rate and domestic inflation rate differentials, and applying a price transmission elasticity of 0.66 between the international and domestic prices, we calculated the resulting poverty impacts on our sample of developing countries. Applying the estimated average increase in the poverty rate of 4.5 percentage points to the estimated 2.3 billion people in poverty according to the dollar-a-day measure, we obtained a global estimate of an additional 105 million people falling below the poverty line as a result of the food price increases through the first quarter of 2008. Subsequent increases in food prices probably increased the number even further (World Bank 2009).

Urban

Total

Vietnam

Rural Urban

Total

Wheat

Rice

Sugar

Maize

Commodities included in analysis

Total

Simple average

Figure 2.2. Percentage point poverty changes following a 10 per cent rise in specific commodities without wage impacts

Total

Total

Wheat

Sugar

Rice

Poultry

Beef

Dairy

Commodities inlcuded in analysis

Wheat

Change in poverty rate (percentage points)

Urban

Maize

Rural

1.0 0.8 0.6 0.4 0.2 0.0 –0.2

Rice

Change in poverty rate (percentage points)

0.4 0.2 0.0 –0.2 –0.4 –0.6 –0.8 –1.0 –1.2

Sugar

Nicaragua

Maize

Cambodia

Commodities included in analysis

Poultry

Total

Beef

Total

Poultry

Beef

Rural

Commodities included in analysis

Dairy

Change in poverty rate (percentage points)

Total

Wheat

Rice

Sugar

3.0 2.5 2.0 1.5 1.0 0.5 0.0 –0.5

Dairy

Urban

Poultry

Dairy

Rural

Maize

Beef

Change in poverty rate (percentage points)

0.6 0.4 0.2 0.0 –0.2 –0.4

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Table 2.1. Change in global food prices between 2005 and the first quarter of 2008 Price change (in percentage points) 0 100 150 40 110 50 220

Beef Dairy Maize Poultry Rice Sugar Wheat

Our empirical results suggest that large increases in world food prices need to be taken very seriously. While some poor people benefit from higher food prices, the number of gainers is offset by a larger number of poor people who are adversely affected, and substantially more poor households in lowincome countries will be hurt than will be helped by rising food prices. Change in poverty (in percentage points)

1 0.8 0.6 0.4 0.2 0 Rural No wage

Urban

Total

Stratum of households considered

Integrated Segmented

Figure 2.3. Comparison of the average poverty impacts of a 10 per cent food price increase under different labour closure scenarios

Why might results differ between studies? The results of our study differ in some respects from those of some recent studies. Given the importance of understanding the effects of changes in

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food prices on the poor, we have attempted to find out why these results might differ. At least three key reasons for differences between studies can be identified: (i) country coverage; (ii) commodity coverage; and (iii) methodology.

Country coverage Country coverage matters enormously in studies of the impact of food prices on poverty, as is evident from studies such as those of Ivanic and Martin (2008) and Hertel and Winters (2006). Part of this difference arises from the importance of different commodities. Rice prices, for instance, are more likely to have a large impact on poverty in Asia than in Africa. Another important difference arises from the distribution of productive resources within the country. If poor people are net sellers of rice as, for example, appears to have been the case in Vietnam (Minot and Goletti 1998; Ivanic and Martin 2008; Vu and Glewwe 2008), then an increase in the price of rice is more likely to reduce poverty than would otherwise be the case. Another potentially important reason for differences between countries is differences in countries’ net trade status. A country which is an exporter is likely to benefit more from higher prices of its exports, since their production employs domestic factors whose returns, such as wages, increase too. In Vietnam, it appears that increases in prices have directly benefited poor small-farmers who are also net sellers of the good (Ivanic and Martin 2008). In Brazil, the poor gain more through increases in the demand for their labour (Filho and Horridge 2006). Differences between countries in their levels of development, and their own definitions of poverty, if national poverty lines are used, are also likely to affect the impacts on poverty of commodity price changes. As emphasised by Anderson (1995), farmers in poor countries tend to use few purchased inputs in production, and consume a large fraction of their output. In these countries, the poor frequently spend up to three-quarters of their incomes on food. In poor countries, therefore, the gains (if any) to farmers from higher food prices are modest and the costs to the poor (both rural and urban) who are not engaged in farming can be very high. As countries become richer, all of these characteristics change. Farmers become more market-oriented, increasing their use of purchased inputs

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and focusing more on selling their output in the market, hence creating leverage between farm prices and their net income. The share of spending on food also falls sharply as incomes rise, making households less vulnerable to increases in food prices as they grow richer.

Commodity coverage Commodity coverage is another potentially important source of differences in results. As shown above, our analysis suggests that the impacts of increases in the prices of staple foods are likely to be povertyincreasing in poor countries. It seems less clear that increases in the prices of relative luxuries will be poverty increasing. This difference is seen in a number of countries, even in our results for staple foods (Ivanic and Martin 2008). Another potentially important difference is whether cash crops such as coffee and tea (or non-food cash crops such as cotton) are included in the analysis. Increases in the prices of cash crops directly increase the incomes of the farmers selling them, and may have little or no adverse impact on the living costs of consumers. Increases in the prices of cotton have been found to have sharply beneficial effects on poverty reduction in a number of countries (Bussolo et al. 2006; Orden et al. 2006). Differences in commodity coverage may be somewhat more subtle than the stark contrast above. Hertel et al. (2008, Table 6) found that increases in world prices of agricultural products resulting from WTObased liberalisation in the industrialised countries would reduce poverty in nine of 15 developing countries. Since the effect on developing countries operates through increases in world prices, this might appear to contradict our finding (Ivanic and Martin 2008) that higher food prices increase poverty. However, as argued by Hertel and Martin (2008), the key difference is between the much broader group of agricultural commodities defined by the WTO and the narrow set of staple foods considered by Ivanic and Martin (2008).

Methodology The methodology used in the analysis is another potentially important source of differences in results. Here, a key distinction is that between the nature of the changes in the exogenous variables used to represent the policy experiment and the methodology used to assess their impacts.

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One common source of confusion when considering the impacts of agricultural trade reform on poverty has been a failure to distinguish between analyses that involve changes in the international prices of agricultural commodities and those that involve liberalisation of agriculture in the country itself. The study by Morley and Piñeiro (2003) looked at rises in world agricultural prices and poverty reduction in 11 of 15 Latin American countries, including Peru. However, the experiment performed in this analysis involved eliminating tariffs on agricultural imports in these countries, and hence reducing the prices of imported goods relative to world prices. Once the appropriate set of exogenous changes has been formulated, a wide range of different approaches have been used, including: (i) approaches that shift the entire distribution of income in line with a change in the average income of a representative household; (i) approaches that use information from household surveys on income and expenditure patterns of people living near the poverty line (e.g. Ivanic 2006); (ii) partial equilibrium approaches that use household data on commodity prices and, possibly, net sales of labour to assess the impacts of price changes on the poor (e.g. Ravallion 1990; Chen and Ravallion 2004; Ivanic and Martin 2008); and (iii) general equilibrium analyses in which the income and spending behaviour of households are determined within the model. The proportional change approach is used in many studies seeking a very broad estimate of the impact on poverty, such as an assessment of the impact of a trade reform on global poverty (see, for example, Anderson, Martin and van der Mensbrugghe 2006). The approach using information on the income sources and expenditure shares of people near the poverty line is a substantial improvement as it takes into account the impacts of price changes on incomes and the cost of living. It has allowed practitioners such as Ivanic (2006) to perform analyses using larger numbers of sample countries than would be the case with approaches using information on the income sources and expenditure patterns of all people. When using partial equilibrium approaches, a key distinction is between studies that consider only the demand side, and those that consider both impacts on expenditures and incomes. Studies such as that of Friedman and Levinsohn (2002), which focus on the demand side, can provide important and valuable insights, and are feasible in cases

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where surveys do not include income sources. As noted by Friedman and Levinsohn, the importance of self-production of food by poor households can have a significant influence on the results. Studies using information from household surveys on both expenditure and income patterns are perhaps the most common in analysis of the impacts of changes in food prices or in agricultural trade policy on poverty. Many of these studies rely on general equilibrium model-based analysis to estimate the price and wage changes faced by households (see, for example, Chen and Ravallion 2004). In this situation, a key requirement is for consistency between the commodity and factor shares in the model and those in the household surveys (Hertel and Reimer 2005). This top-down approach has the advantage of allowing use of the full richness of the household survey data where these are available with a level of disaggregation appropriate to the question at hand. Full general equilibrium treatment with detailed information from the household surveys fully incorporated is clearly desirable. However, this has presented computational difficulties in the past. One approach to resolving this problem has been to use a small number of representative households, whose incomes change equiproportionately. Clearly, this method has the disadvantage of reducing the variability in the income and consumption that can be crucial to accurately capturing the impacts of changes in food prices on poverty. Perhaps the most promising longterm solution to this problem is to incorporate individual households within a general equilibrium model (see, for example Bourguignon et al. 2003; Rutherford et al. 2005). However, this is relatively demanding in terms of modelling resources, and most analyses have tended to use the top-down approach suggested by Hertel and Reimer (2005). A full general equilibrium treatment has other potential advantages because of its ability to capture potential second-best impacts such as changes in levels of employment resulting from changes in food prices. In a study of India, Polaski et al. (2008) concluded that increases in the export price1 of rice reduce poverty in a model where the producer real wage declines, and hence unemployment falls, because the consumer real wage is held constant by assumption. This is a striking finding given that Cai et al. (2008, Table 21.2) found, using a partial equilibrium approach based on detailed survey results, that higher rice prices reduce the 1

This result is used to support an argument for import protection on rice, although the effect of protection with this labour market closure is to increase producer real wages and to reduce employment.

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incomes of 81 per cent of poor farm households and essentially all poor non-farm households in India.

Crisis and intersectoral linkages While it is widely believed that labour markets in developing countries are strongly segmented between urban and rural, at least some of the (limited) evidence available suggests that these markets are more integrated than they are generally assumed to be (Bertrand and Squire 1980). While the differences in wage rates between urban and rural areas are typically large, much of this difference appears to reflect differences in labour quality and skill levels, rather than distortions such as those identified in dual-economy models. While changes in food prices have a positive impact on the overall wage rates for all commodities in our analysis – meaning that a rise in the price of the commodity translates into an increase in the returns on factors used in the production – these second-order effects are very small, especially for mobile factors such as labour. For example, in the case of a single labour market we find that a 100 per cent change in the price of food commodities translates on average into a 2 per cent rise in the wage rate (with a maximum of 20 per cent for the most labour-intensive commodities). Even if the labour market is split into agricultural and non-agricultural labour with restricted movement between the two, the wage gains to those employed in agriculture are on average 7 per cent of the change in the commodity price with a maximum of 50 per cent.

Long-term impacts of food price rises on poverty While the overwhelming body of evidence appears to suggest that the short-term effects of rising prices of staple foods on poverty in poor countries are adverse, the longer term impacts may differ as households change the mix of commodities that they produce and consume. In general, these changes would be expected to increase the benefits of the price changes to producers and to reduce the adverse impacts on consumers. Another potentially important difference between the short term and the medium term highlighted in the literature is the possibility that agricultural wage rates will increase more over the medium term than in the short term when agricultural prices rise (Ravallion 1990). Studies that compare the long-term and the short-term impacts of higher food prices on poverty are unfortunately rare. Current work by

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the authors seeks to extend the analysis of Ivanic and Martin (2008) from the short to the medium term. Ravallion (1990) provides at least one important case in which the impact of rice prices on poverty is reversed when impacts on wage rate are taken into account. Friedman and Levinsohn (2002) found that the impacts are reduced by allowing for price responsiveness in demand, but this reduction is not enough to change the policy implications.

Should agricultural trade policy be reconsidered? Some critics suggest that agriculture in developing countries has undergone sweeping liberalisation at the behest of economists, particularly those working at international agencies such as the World Bank, and that this has increased its vulnerability. Before accepting or rejecting this view, it is very important to have a clear idea of what the recommendations of economists have been.

What should policies be? As emphasised by Timmer (1991), there are many areas where economists have not reached a consensus on the role of agriculture in achieving poverty reduction, food security and economic development. An influential contribution to thinking on agricultural policies in developing countries was the classic World Development Report 1986 (World Bank 1986) on agriculture. This report concluded that the rate of protection of agriculture in developing countries was generally negative – meaning that it was taxed rather than protected – and that the effects of the resulting suppression of the agricultural sector on national economic development had generally been negative. It also expressed concerns about the high and rising protection to and subsidisation of agriculture in the industrialised countries – which lowered world prices and lowered and destabilised the returns to producers in developing countries. Problems associated with the use of price insulating policies in rich and poor countries also occurred because of the resulting increases in the variability of world prices. A concern raised particularly in the landmark study of agricultural incentives by Krueger et al. (1988) has been the presence of protection to import-competing agricultural activities (which are frequently staple foods), alongside negative protection to export-oriented sectors (which are frequently cash crops). This combination of policies has been seen as generating high economic costs as resources are pulled into less

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productive, import-competing activities. The fact that many protected products are staple foods has frequently also been identified as creating potential problems for the poor. A key need when discussing food security is to be very clear about the nature of the problem. One view tends to associate national food security with national food self-sufficiency. However, as Sen (1981) has so effectively pointed out, national self-sufficiency is neither necessary nor sufficient for ensuring food security. The critical thing is whether households and individuals have access or ‘entitlements’ to the food they need. Once the entitlement approach is accepted, there are two very different policy agendas to consider. In the short term, measures are needed to ensure that individuals – and particularly the poorest – have access to the food that they need even under conditions of very high prices. In the longer term, policy needs to focus on raising the incomes of the poor. As incomes rise, the share of income spent on food declines, creating a ‘buffer’ of nonessential expenditures that can be reduced without threatening an individual’s food security (Timmer 2000). Policies designed to increase national self-sufficiency through protection, which lowers real national income, will reduce the extent to which this long-term agenda can be achieved. There is a broad consensus among agricultural economists that investments in agricultural research and development are vital for securing long-term poverty reduction. Policies leading to higher yields improve the productivity of poor farmers, raising their incomes by raising their net sales. Unlike higher food prices, improved yields do not raise the prices of food to poor consumers – and may reduce food prices by increasing supply. The literature concludes that the marginal rates of return on these policies are generally extremely high, with a median rate of return averaging almost 50 per cent per year (Evenson 2001, p. 614) even during a period in which world agricultural prices were very low. The continuation of such high rates of return on these investments suggests that investments in research and development and other agricultural public goods have continued to be too low (World Bank 2008). Despite the broad acceptance of Sen’s views among agricultural economists, self-sufficiency goals for food continue to have a strong influence on policy. In larger countries, the self-sufficiency goal tends to be buttressed by arguments that high levels of imports would cause the price of imported food to rise, particularly given the small share of international trade relative to world production of commodities such as rice. However, a key reason for the small share of staples such as rice and wheat in international trade is the pervasive protection to these commodities in both industrial

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and developing countries. In this area, there appears to be something of a collective action problem – if protection were reduced across the board, import demand would rise, but the depth of the market would rise in turn, reducing the original concern about the thinness of the market. The conventional wisdom among economists is that short-term problems associated with high prices of staple foods are best dealt with by targeted safety-net measures, such as food distribution programmes focused on meeting the needs of the poor. These programmes focus limited government resources on those in need, without creating the disincentives for production associated with the use of trade measures to lower domestic prices, or the shortages associated with the use of price controls. One problem with these programmes is that they are expensive and slow to establish if they are not already in existence before the emergence of a crisis. One important source of controversy among economists is whether – and if so how – to seek to stabilise prices of staple foods. Some economists have argued that the costs of national stabilisation schemes will probably outweigh their benefits (Anderson and Roumassett 1996, p. 62). Others have argued that stabilisation schemes using varying rates of protection are likely to be more cost-effective than storage schemes in stabilising domestic prices (e.g. Reutlinger and Knapp 1980), while still others have supported the use of stabilisation programmes more generally on the grounds of difficulty in using other forms of assistance, such as safety nets. Timmer (2000) argues that Asian governments, in particular, have chosen to stabilise the price of rice on the grounds that the redistributions associated with large changes in rice prices are too politically costly to bear. One concern about the widespread use of trade measures to stabilise domestic markets by insulating them from shocks in world markets is the consequential increase in the variability of world market prices (Schiff 1985; Tyers and Anderson 1992). Since the shocks to production in individual regions are not strongly correlated, moving from autarchy to an integrated world market is an extremely efficient way of diversifying and reducing price volatility. Individual countries can further reduce the volatility of their domestic prices relative to world prices by insulating themselves from shocks to world market prices (Reutlinger and Knapp 1980; Valdés and Foster 2005). A potential problem with this approach to policy is that it increases the volatility of world prices. Historically, price insulating policies have been extensively used in the industrialised countries, with the effect of exporting instability

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to developing countries. One of the clearest examples of such policies was the traditional Common Agricultural Policy (CAP) in Europe, with a variable import levy that adjusted to maintain stable domestic prices in situations of variable import prices; an export subsidy that varied so as to insulate the domestic market for exportables from changes in world prices; and variable export taxes that came into play during periods of high prices. A key outcome of the Uruguay Round negotiations was to reduce the extent of this insulation, with its ban on variable levies; disciplines on the level of tariffs; disciplines on export subsidies; and disincentives for use of administered prices.2 Much discussion during the Doha Development Round of negotiations has been on measures that provide developing countries with the flexibility to adjust their trade barriers in a way that allows them to offset fluctuations in world prices. Measures such as the Special Safeguard Mechanism (SSM) and the exemption of many Special Products from tariff cutting provide increased ability to insulate markets against external shocks, as do the provisions to allow developing countries to use export subsidies for marketing and transport expenses. This demand for flexibility is completely understandable in view of the difficulties that developing countries face in managing volatility. Given the much greater ability of producers and consumers in the industrialised countries to manage price volatility, a situation where developing countries have access to such price insulating measures and the industrialised countries do not, better balances risk with the ability to bear it than the traditional situation. However, the efficacy of price insulating measures for developing countries may be diminished by the consequent increase in volatility of world prices.

What policy changes have occurred? While liberalisation is frequently blamed for the current crisis, this criticism rarely seems to be based on actual examination of the policy changes that have occurred. We begin by examining the longer term evolution of policies, and then turn to the policies adopted by countries in response to the crisis. 2

Administered prices out of line with world markets are unsustainable without trade barriers. However the protection provided using administered prices is subject to a double penalty under the Uruguay Round agreement, being disciplined under the provisions for tariffs or export subsidies, and under the disciplines on domestic support.

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Long-term policy changes The major World Bank study led by Kym Anderson provides data on agricultural trade distortions for roughly 70 countries for periods of up to 50 years. Many of the preliminary results from this study inform the World Development Report 2008 (World Bank 2008), with its comprehensive assessment of the role of agriculture in economic development. These results provide an essential long-term perspective on developments. Another important perspective is provided by the responses of countries to the recent surge in prices for agricultural commodities. Figure 7.2 in Chapter 7 of this volume by Kym Anderson shows the trend in the nominal rate of assistance3 to agriculture in developing and industrialised countries drawn from Anderson’s study. This shows that the initial situation of developing country agriculture, in the 1950s, was not one of protection, but of quite heavy direct taxation. Interestingly, it shows that the nominal rate of assistance to agriculture in developing countries has been increasing, rather than decreasing, and moved from negative to positive in the mid-1990s. Agricultural protection was, and continues to be, much higher in the industrialised countries than in developing countries, but has shown some signs of declining since the late 1980s, when the Uruguay Round focused attention on the problems of rising agricultural protection. Figure 7.4 in Chapter 7 shows the direct assistance to importcompeting and export-oriented agriculture in developing countries. An important feature of the Figure is the negative assistance/taxation to export-oriented agriculture in the early period. This taxation reached a peak in the mid-1980s, and has since declined essentially to zero. For import-competing agricultural products, initial protection was positive, and grew until it reached a peak in the late 1980s, when world prices for many commodities were very low. Since then protection to importcompeting goods has been relatively stable. For incentives to agricultural production, what matters is not just the nominal rate of assistance, but that rate relative to the assistance provided to other tradable sectors. The relative rate of assistance provides a simple summary measure of agricultural protection relative to non-agricultural protection. Relative to the nominal rates of assistance, Figure 7.5 in Chapter 7 shows just how substantial were the burdens imposed on 3

This measure corresponds to a proportional tariff rate where import tariffs are used to provide protection (see Anderson et al. 2008).

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developing-country agriculture in the early part of the sample period. Protection to the non-agricultural sector was very high, and this imposed substantial indirect burdens on agriculture, with the result that the relative rate of assistance was, at negative 60 per cent, almost three times as large as the nominal rate of assistance. The very rapid reductions in protection to other sectors have contributed to the much more rapid increase in the relative rate of protection. One important finding from these results appears to be that agricultural protection in developing countries has, overall, been increasing rather than declining over the last 50 years. Much of this increase in protection has come from something consistent with the conventional wisdom of economists – the reduction in taxation of agricultural exportables. However, the trend in protection of agricultural importables – something that is not consistent with the conventional wisdom of agricultural economists – has been broadly similar to the upward trend in protection of exportables. This common trend suggests that both have been driven more by political-economy factors of the type emphasised by Anderson (1995) and Lindert (1991) than by the advice of economists or international agencies. An important feature of trade policy for rice, and perhaps some other staple food commodities, is a tendency for changes in border protection to be used to offset fluctuations in world prices and to make domestic prices less unstable than world prices. This policy of insulation – identified by Timmer (2000) as a key element of agricultural trade policy throughout Asia – is strongly evident in Southeast Asia (Figure 2.4). Some of the economies covered by these graphs are consistent importers of rice so that this outcome can be obtained by varying the rate of import protection. Some others, such as India, have been importers in some periods and exporters in others, so that this policy outcome requires use not just of tariffs, but also of export subsidies or taxes or restrictions. A key problem with the use of export restrictions is that they tend to reduce the demand for exports by reducing the confidence of importers in the reliability of the suppliers using them, and the world market generally.

Policy changes and the recent crisis The large price shocks experienced by developing countries in the past year, and the serious vulnerabilities identified in our empirical analysis contributed to rapid policy responses. A recent World Bank survey

600

40

500

20

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0

300 –20

200

2003

2000

1997

1994

1991

1988

1985

1982

1979

–60 1976

0 1973

–40 1970

100

NRA in %

will martin and maros ivanic

Price in USD

42

Observed time period World price (USD) NRA (%)

Share of incidence (percentage points)

Figure 2.4. Price insulating policies in the market for rice in Southeast Asia Source: World Bank (2008) 60 50 40 30 20 10 0 Reduce foodgrain taxes

Increase foodgrain stocks

Export restrictions

Price controls/ consumer subsidies

None

Policy response

Figure 2.5. Policy responses of developing-country governments expressed as share of the 120 countries surveyed Source: Wodon and Zaman (2008)

highlights the diversity of food price policy approaches used in the 120 responding countries. Figure 2.5 shows that the most commonly adopted policies involved consumer subsidies, food price controls or reductions in food taxes. Other common policy responses were export restrictions, with close to 30 per cent of countries reporting their implementation, and increasing food grain stocks – an approach which might have been helpful to the countries involved had the food crisis worsened, rather than abating in the second half of 2008. Revenga (2008) shows that a large number of developing countries, especially in South Asia and the Middle East, have also used safety-net programmes such as targeted cash transfers or food rations to deal with

food price crisis, poverty and agricultural policy

43

the problems associated with the food price increases. Economists tend to rank such safety-net policies as more desirable than broader price policy measures (Lustig 2008; Zaman et al. 2008), but the latter appear to have been more popular among policy makers. At least some of the interventions designed to reduce the severity of price increases domestically seem to have had a strong upward impact on the price of rice. The imposition of export restrictions by India and Vietnam, and emergency measures to increase stocks in the Philippines appear to have been associated with sharp increases in the world price of rice (Revenga 2008).

The potential role of the WTO A key question analysed in detail in Chapter 12 of this volume is the potential role of the WTO. One view is that a WTO agreement to liberalise agricultural markets would raise world agricultural prices, and hence should not be undertaken at a time of high international prices. However, the increases in the prices for staple foods are likely to be very small and, in a comprehensive agreement, domestic prices in developing countries would probably fall because of reductions in tariffs on their imports. Current proposals involve some significant liberalisation of agriculture in industrialised countries, and virtually none in developing countries (Martin and Mattoo 2008). Such an agreement can be expected to increase world prices only very slightly. As noted above, its contribution to poverty reduction could be expected to be mildly favourable in developing countries because it increases opportunities for exports of non-staple agricultural products (Hertel and Martin 2008). The adoption of current proposals would reduce the ability of the industrialised countries to insulate their markets, and hence reduce the volatility of world prices in future. The proposed abolition of export subsidies would reduce the destabilising effects of export subsidies on world prices in periods when prices are low. The proposals to allow developing countries to impose special safeguards against imports would help reduce the volatility of prices in individual countries, but these gains would be likely to be offset substantially by increased volatility of world prices if these special safeguards were used extensively by many developing countries. The right of developing countries to continue using export subsidies to offset marketing and transport expenses also helps individual countries to stabilise their domestic prices relative to world prices, but contributes to greater instability in world markets.

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Summary The recent food price increases are a potentially serious problem for many poor people in poor countries. Our analysis suggests that governments need to be very concerned about the potential adverse impacts of high prices of staple foods on the poor. Our results suggest that the increases up to the first quarter of 2008 could have thrown more than 100 million additional people into poverty and eliminated seven years of progress in long-term poverty reduction. The increase in poverty is large because of the high share of household expenditure on staple foods by poor people, and the tendency for many poor farmers to be purchasers of staple foods. Most studies that focus on the effects of higher food prices find similarly adverse impacts – many of the studies that find favourable effects address other questions, or incorporate linkages through increases in total employment. The policy responses to this problem need to have both a long-term and a short-term dimension. In the long term, the key is to focus on development policies that raise the incomes of the poor, and hence provide them with a buffer against food insecurity. Key elements for this in the agricultural sector include investments in rural research and development, and in infrastructure. In trade policy, an open trade regime is generally most helpful for promoting development, since it provides incentives for producers to focus on the goods that yield the highest returns, and reduces the cost of food to consumers, and particularly to the poorest consumers. While protection policies are likely to increase national self-sufficiency, they may reduce the food security of individuals and households. Examination of the historical record of agricultural protection makes it clear that the policy path advocated by economists and most international institutions has only been partially transformed into policy reforms in developing countries. Reductions in the taxation of exportable agricultural goods do seem to be consistent with the recommendations of virtually all economists. By contrast, the parallel increase in protection to import-competing agriculture is not consistent with the advice of most economists. The widespread use of price-insulating policies in the market for rice appears likely to have contributed to relatively more stable domestic prices, but more variable international prices. The continuing high rates of return on investments in research and development suggest that considerably greater investments in this area could be justified.

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Given the potentially adverse impacts of short-term increases in grain prices, governments will continue to need to intervene. Where they are feasible, safety-net approaches have the important advantage of allowing assistance to be targeted to those most vulnerable. Price-insulating policies can reduce the variability of domestic prices relative to world prices but, if widely adopted, seem likely to offer less protection than they might appear to because of the resulting increase in the volatility of world prices.

References Aksoy, M. A. and Izik-Dikmelik, A. 2008. ‘Are Low Food Prices Pro-poor? Net Food Buyers and Sellers in Low Income Countries’, Policy Research Working Paper 4642, Washington, DC: World Bank. Anderson, K. 1995. ‘Lobbying Incentives and the Pattern of Protection in Rich and Poor Countries’, Economic Development and Cultural Change 43: 401–23. Anderson, J. and Roumasset, J. 1996. ‘Food Insecurity and Stochastic Aspects of Poverty’, Asian Journal of Agricultural Economics 2: 53–66. Anderson, K., Kurzweil, M., Martin, W., Sandri, D. and Valenzuela, E. 2008. ‘Measuring Distortions to Agricultural Incentives, Revisited’, World Trade Review 7: 675–704. Anderson, K., Martin, W. and van der Mensbrugghe, D. 2006. ‘Global Impacts of the Doha Scenarios on Poverty’, in Hertel, T. and Winters, L. A. (eds.), Poverty and the WTO: Impacts of the Doha Development Agenda. New York and Washington, DC: Palgrave Macmillan and the World Bank. Asian Development Bank 2008. ‘Food Prices and Inflation in Developing Asia. Is Poverty Reduction Coming to an End?’. Manila: Asian Development Bank. Bertrand, T. and Squire, L. 1980. ‘The Relevance of the Dual Economy Model: A Case Study of Thailand’, Oxford Economic Papers, New Series 32: 480–511. Bourguignon, F., Robilliard, A. S. and Robinson, S. 2003. ‘Representative versus Real Households in the Macro-economic Modeling of Inequality,’ Working Papers DT/2003/10, DIAL (Développement, Institutions & Analyses de Long terme), DELTA, Paris. Bussolo, M., Godart, O., Lay, J. and Thiele, R. 2006. ‘The Impact of Commodity Price Changes on Rural Households: The Case of Coffee in Uganda’, Policy Research Working Paper 4088, Washington, DC: World Bank. Cai, Jing, de Janvry, A. and Sadoulet, E. 2008. ‘Rural Households in India: Sources of Income and Incidence of Burden of Rising Prices’, Mimeo, University of California, Berkeley. Chen, S. and Ravallion, M. 2004. ‘Welfare Impacts of China’s Accession to the World Trade Organization’, in Bhattasali, D., Li, Shantong and Martin, W. (eds.), China and the WTO: Accession, Policy Reform, and Poverty Reduction

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Strategies. Oxford and Washington, DC: Oxford University Press and the World Bank. Demombynes, G., Rubiano, E. and Sobrado, C. 2008. The Effect of Rising Food Prices on Poverty in Honduras, Mimeo, World Bank, 24 September. Evenson, R. 2001. ‘Economic Impacts of Agricultural Research and Extension’, in Evenson, R. and Pingali, P. (eds.), Handbook of Agricultural Economics 1: 573–626. Amsterdam: North Holland. Filho, J. B., and Horridge, M. 2006. ‘The Doha Round, Poverty, and Regional Inequality in Brazil’, in Hertel, T. and Winters, L. A. (eds.), Poverty and the WTO: Impacts of the Doha Development Agenda. New York and Washington, DC: Palgrave Macmillan and the World Bank. Friedman, J. and Levinsohn, J. 2002. ‘The Distributional Impacts of Indonesia’s Financial Crisis on Household Welfare: A “Rapid-response” Methodology’, World Bank Economic Review 16: 397–423. Hertel, T. and Martin, W. 2008. ‘Food Prices and Poverty: Confusion or Obfuscation? Reply’, Dani Rodrik’s Weblog, May 26 (www.rodrik.typepad.com/dani_rodriks_weblog/2008/05/food-prices-and.html). Hertel, T. and Reimer, J. 2005. ‘Predicting the Poverty Impacts of Economic Reforms’, Journal of International Trade and Economic Development 14: 377–405. Hertel, T. and Winters, L. A. (eds.) 2006. Poverty and the WTO: Impacts of the Doha Development Agenda. New York and Washington, DC: Palgrave Macmillan and the World Bank. Hertel, T., Keeney, R., Ivanic, M. and Winters, L. A. 2008. ‘Why isn’t the Doha Development Agenda more Poverty Friendly?’, GTAP Working Paper 37, Center for Global Trade Analysis, Purdue University, May. Ivanic, M. 2006. ‘The Effects of a Prospective Multilateral Trade Reform on Poverty in Developing Countries’, in Hertel, T. and Winters, L. A. (eds.), Poverty and the WTO: Impacts of the Doha Development Agenda. New York and Washington, DC: Palgrave Macmillan and the World Bank. Ivanic, M. and Martin, W. 2008. ‘Implications of Higher Global Food Prices for Poverty in Low-income Countries’, Agricultural Economics 39: 405–16. Krueger, A. O., Schiff, M. and Valdés, A. 1988. ‘Measuring the Impact of Sectorspecific and Economy-wide Policies on Agricultural Incentives in LDCs’, World Bank Economic Review 2: 255–72. Lindert, P. 1991. ‘Historical Patterns of Agricultural Protection’, in Timmer P. (ed.), Agriculture and the State. Ithaca, NY: Cornell University Press. Lustig, N. 2008. ‘Thought for Food: The Challenges of Coping with Soaring Food Prices’, Mimeo, Washington, DC: Center for Global Development, September. Martin, W. and Mattoo, A. 2008. The Doha Development Agenda: What’s on the Table?, World Bank Policy Research Working Paper 4672, World Bank.

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Minot, N. and Goletti, F. 1998. ‘Export Liberalization and Household Welfare: The Case of Rice in Vietnam’, American Journal of Agricultural Economics 80: 738–49. Morley, S. and Piñeiro, V. 2003. The Effect of WTO and FTAA on Agriculture and the Rural Sector in Latin America, DSGD Working Paper 3. Washington, DC: International Food Policy Research Institute. Orden, D., Salam, A., Dewina, R., Nazli, H. and Minot, N. 2006. ‘The Impact of Global Cotton and Wheat Prices on Rural Poverty in Pakistan’, The Pakistan Development Review Part II, 45: 601–17. Polaski, S., Ganesh-Kumar, A., McDonald, S., Panda, M. and Robinson, S. 2008. India’s Trade Policy Choices: Managing Diverse Challenges. Washington, DC: Carnegie Endowment for International Peace. Ravallion, M. 1990. ‘Welfare Changes of Food Price Changes under Induced Wage Responses: Theory and Evidence for Bangladesh’, Oxford Economic Papers 42: 574–85. Reutlinger, S. and Knapp, K. 1980. ‘Food security in food importing countries’, World Bank Staff Working Paper 393, Washington, DC: World Bank. Revenga, A. 2008. ‘Food and Energy Policy Price Increases and Policy Options’, Washington, DC: World Bank (www.siteresources.worldbank.org/NEWS/ Resources/risingfoodprices_backgroundnote_apr08.pdf). Rutherford, T., Shepotylo, O. and Tarr, D. 2005. ‘Poverty Effects of Russia’s WTO Accession: Modeling “Real” Households and Endogenous Productivity Effects’, Policy Research Working Paper 3473. Washington, DC: World Bank. Schiff, M. 1985. ‘An Econometric Analysis of the World Wheat Market and Simulation of Alternative Policies, 1960–80’, ERS Staff Report AGES850827. Washington, DC: US Department of Agriculture. Sen, A. 1981. Poverty and Famines: An Essay on Entitlement and Deprivation. Oxford University Press. Timmer, C. P. 1991. ‘The Role of the State in Agricultural Development’, in Timmer, C. P. (ed.), Agriculture and the State: Growth, Employment and Poverty in Developing Countries. Ithaca and London: Cornell University Press. –––2000. ‘The Macro Dimensions of Food Security: Economic Growth, Equitable Distribution, and Food Price Stability’, Food Policy 25: 283–95. Tyers, R. and Anderson, K. 1992. Disarray in World Food Markets: A Quantitative Assessment. Cambridge University Press. Valdés, A. and Foster, W. 2005. ‘The New SSM: A Price Floor Mechanism for Developing Countries’. Geneva: International Center for Trade and Sustainable Development (www.ictsd.net/downloads/2008/08/avaldesfinal.pdf). Vu, Linh and Glewwe, P. 2008. Impacts of Rising Food Prices on Poverty and Welfare in Vietnam, Mimeo, University of Minnesota, June.

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Warr, P. 2005. ‘Food Policy and Poverty in Indonesia: A General Equilibrium Analysis’, Australian Journal of Agricultural and Resource Economics 49: 429–51. Wodon, Q. and Zaman, H. 2008. ‘Rising Food Prices in Sub-Saharan Africa: Poverty impact and policy responses’, Policy Research Working Paper 4738, World Bank. World Bank 1986. World Development Report 1986. Washington, DC: World Bank and Oxford University Press. World Bank 2008. World Development Report 2008. Washington, DC: World Bank. World Bank 2009. Global Economic Prospects and the Developing Countries. Washington, DC: World Bank. Zaman, H., Delgado, C., Mitchell, D. and Revenga, A. 2008. ‘Rising Food Prices: Are There Right Policy Choices?’, Mimeo, World Bank.

3 Globalisation of agriculture and food crises: then and now eugenio d Í az-bonilla*

Déjà vu all over again?1

1.

Introduction

In the first half of the 1970s food prices skyrocketed, leading to concerns about social and political stability in food-importing developing countries, about the fate of the poor in general, and even about whether the world had reached the ‘limits to growth’ and the ability to feed itself in the following years. The international system moved into action and the first World Food Conference was convened in Rome in 1974 under the auspices of the Food and Agriculture Organization of the United Nations (FAO). A three-point plan was approved, including: *

*

*

the establishment of a food bank, which would offer access to about 10 million tonnes of stored grain; the creation of the International Fund for Agricultural Development (IFAD), a new financial institution specialised in agriculture, committing US$ 5 billion every year for ten years to improve agriculture (more than three times the level of world investment at the time); and a new food forecasting system providing early warning of future crises.

Also, the International Monetary Fund (IMF), the World Bank, and the regional banks implemented special programmes to alleviate the shortterm financial impact on the balance of payments and fiscal accounts, and to invest in the long-term factors of production. Food entered the diplomatic debate as another possible instrument of negotiation and * Executive Director, Inter-American Development Bank. 1 With due attribution to Lawrence Peter ‘Yogi’ Berra, famous baseball player and manager.

49

50

eugenio d Í az-bonilla

coercion among nations. More generally, at the end of the 1970s, negotiations were under way on a large number of International Commodity Agreements that tried to stabilise prices. However, a few years and two world slowdowns later, an article in Foreign Affairs entitled ‘A World Awash in Grain’ summarised the changing circumstances (Insel 1985). Fast-forward about three decades, and in the second half of 2007 and early 2008 another important increase in food prices triggered similar concerns and reactions including riots in some developing countries. Another high-level intergovernmental conference on World Food Security was convened in June 2008 by FAO, where, among other things, 1.2 billion dollars in food aid were committed for the countries most affected by rising food prices. The financial international organisations announced diverse programmes to cope with the short-term and longterm aspects of the crisis. Prices have now partially abated due to the softening in world economic activity. In the famous words of ‘Yogi’ Berra, is it ‘déjà vu all over again’? This chapter compares the two events (section 2), and then tries to place them in a more general macroeconomic setting (section 3). Section 4 concludes.

2.

Size of the shocks

There are different ways to look at the issue of the size of the food price shocks in the first half of the 1970s, compared to those of 2007–2008. In what follows several angles are presented. In this analysis it should be kept in mind that the data for 2008 are just the average for the first half of that year, and therefore the conclusions are tentative, as events are still evolving.

Agricultural prices (nominal) Figure 3.1 shows the evolution of the nominal index of agricultural prices (monthly from the beginning of 1957 to mid 2008; IMF/International Financial Statistics (IFS) database). It seems clear that until mid 2007 the increases were in the range of previous episodes of the late 1970s and the mid-1990s, and smaller than the 1973–1974 episode, but that since mid2007 there has been a strong acceleration. Figure 3.1 shows levels, with a monthly frequency. Figure 3.2 shows the rate of change (i.e. inflation) in the same nominal index, but at an annual frequency, providing a smoother view of the price developments. It is clear that the aggregate price shock in 1973–1974 was larger than the current one.

M 1 M 195 11 7 M 195 9 8 1 M 96 7 0 1 M 96 5 2 1 M 96 3 4 1 M 96 1 6 M 196 11 8 M 196 9 9 1 M 97 7 1 1 M 97 5 3 1 M 97 3 5 1 M 97 1 7 M 197 11 9 M 198 9 0 1 M 98 7 2 1 M 98 5 4 1 M 98 3 6 1 M 98 1 8 M 199 11 0 M 199 9 1 1 M 99 7 3 1 M 99 5 5 1 M 99 3 7 1 M 99 1 9 M 200 11 1 M 200 9 2 2 M 00 7 4 2 M 00 5 6 20 08

250

200

150

100

50

0

Agriculture

Figure 3.1. Nominal index of agricultural prices

60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08

58

19 19

100

75

50

25

0

–25

–50 Agriculture

Figure 3.2. Growth rate: nominal index of agriculture

gl obalisation of agriculture and f ood crises

53

Table 3.1. Changes in nominal prices of agricultural indices (per cent) Agriculture

Food

1973

2008

1973

2008

t−1 years t−2 years t−3 years t−4 years

72.2 87.7 90.2 95.4

25.5 41.2 55.1 56.2

80.3 94.7 101.1 111.3

33.0 53.2 69.3 67.7

t+1 years t+2 years t+3 years t+4 years

20.5 −2.2 2.6 10.8

na na na na

23.8 −0.7 −7.0 −9.7

na na na na

Raw materials 1973 61.0 83.7 82.3 86.8 2.1 −12.8 13.5 15.3

Beverages

2008

1973

2008

3.3 8.4 18.0 18.6

26.9 39.2 26.3 37.5

26.5 44.0 56.0 84.2

na na na na

21.2 2.4 85.1 225.6

na na na na

Table 3.1 disaggregates price developments into the three components of the nominal agricultural index: food, agricultural raw materials, and beverages, and presents percentage changes in prices centred on 1973 and 2008 (keeping in mind the caveat mentioned above that the data for ‘2008’ cover only the first half of the year). In the case of 1973, the table shows those changes compared with one to four years before and after (t − 1 to t − 4, and t + 1 to t + 4, with t =1 973; i.e. the percentage change in the level of prices in 1973 compared to that in the previous years, and in that in the following years compared to 1973). For 2008, obviously, we have only the previous years. The price shocks were significantly larger in 1973–1974 for food and agricultural raw materials than are the current ones. In the case of beverages the one-year shocks in the early 1970s and the late 2000s are comparable, but the run-up to the prices in 2008 has been larger than for the similar four-year window in the 1970s. Note also that prices continued increasing in 1974: the figure for t+1 is positive compared to that for 1973 (t), and it only dropped in 1975. The situation for 2009 is different, as it does not look as though there are going to be further increases (more on this later). After 1975 the situations differ between that for food, which continues to decline in value, and those for beverages and raw materials, whose prices keep on increasing (particularly beverages). One implication of the different behaviour of the different components of the agricultural index is that the different developing countries producing coffee, cacao and tea (many of them in Africa and Central America) were more affected in the 1970s than in 2008 because the prices

eugenio d Í az-bonilla

54

Table 3.2. Changes in nominal prices of specific agricultural products (per cent) Wheat

Corn

Soybean

Rice

1973

2008

1973

2008

1973

2008

1973

2008

t−1 years t−2 years t−3 years t−4 years

100.3 126.5 154.6 139.4

38.8 84.7 132.3 125.8

74.9 67.2 67.3 87.6

49.2 100.3 147.5 117.9

107.1 130.9 148.3 182.3

59.7 133.0 127.0 83.0

97.8 127.6 107.4 60.2

125.8 147.3 160.8 205.4

t+1 years t+2 years t+3 years t+4 years

28.5 6.6 −4.9 −26.2

na na na na

35.8 22.7 15.2 −2.2

na na na na

−4.6 −24.5 −18.8 −2.0

na na na na

82.6 22.5 −14.3 −8.1

na na na na

of beverages had been strengthening during the 2000s ahead of the spike in food prices, which softened the impact on those developing countries. Table 3.2 looks at specific food products: wheat, corn, soybeans and rice; it also compares up to four years before and after, when applicable. Within the one-year horizon, only the increase in the price of rice seems larger than in 1973 (but, again, it must be remembered that 2008 had not ended at the time of writing). Taking a larger horizon, the run-up to 2008 in corn and rice prices appears larger than that for 1973. However, as mentioned before, prices for wheat, corn, and rice (but not soybeans) continued increasing in 1974 and even in 1975, while the projections for prices after 2008 are pointing downwards. Are these price developments relevant only for agriculture or do they reflect more general patterns? This is discussed below.

Commodity prices (nominal) Figure 3.3 shows the nominal values of three indices of commodities (monthly, from the beginning of 1957 to mid 2008; IMF/IFS database): agriculture, metals (values for both given on the left axis) and oil (on the right axis). The run-up in agricultural prices in 2007–2008 seems smaller than in the case of other commodities, and starts later, while in the previous episode all prices appear more coordinated. Also note that the jump in oil prices is measured on a scale that is an order of magnitude larger than the one for agricultural products and metals. Moving from levels, Figure 3.4 shows annual price changes for the same three commodity indices. Although some analyses of food price

M 1 M 195 11 7 M 195 9 8 1 M 960 7 1 M 962 5 1 M 964 3 1 M 966 1 M 196 11 8 M 196 9 9 1 M 971 7 1 M 973 5 1 M 975 3 1 M 977 1 M 197 11 9 M 198 9 0 1 M 982 7 1 M 984 5 1 M 986 3 1 M 988 1 M 199 11 0 M 199 9 1 1 M 993 7 1 M 995 5 1 M 997 3 1 M 999 1 2 M 00 11 1 M 200 9 2 2 M 004 7 2 M 006 5 20 08 7 80

6 70

5

Figure 3.3. Nominal indices 60

4 50

3 40

2 30

20

1 10

0 0

Metals Agriculture Oil

19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 200

175

150

125

100

75

50

25

0

–25

–50 Oil

Figure 3.4. Percentage change of nominal indices Metals Agriculture

gl obalisation of agriculture and f ood crises

57

Table 3.3. Changes in nominal prices of agriculture, metals and oil (per cent) Agriculture

Oil

Metals

1973

2008

1974

2008

1973

2008

t−1 years t−2 years t−3 years t−4 years

72.2 87.7 90.2 95.4

25.5 41.2 55.1 56.2

251.6 370.8 425.0 542.6

52.3 68.5 103.0 186.8

37.4 39.6 27.5 29.2

4.2 22.3 91.0 133.8

t+1 years t+2 years t+3 years t+4 years

20.5 −2.2 2.6 10.8

na na na na

na na na na

34.8 17.3 22.7 29.2

na na na na

−0.4 0.4 8.8 11.1

shocks tend to focus on reasons related to agriculture alone, the synchronicity of the shocks in the 1970s suggests common causes that must be found in global macroeconomic conditions at that time (more on this below). The coordination of agricultural prices with those of other commodities is less clear in the latest episode, but it is present for oil and metals, which began a joint acceleration in prices several years before agricultural prices took off. However, the synchronisation between agriculture and other commodities, mostly oil, has reappeared since mid2007. Even for metals, the rate of growth of the price index, although declining, was positive (i.e. prices in levels, as distinct from price changes, were still growing). While Figure 3.4 illustrates an annual view, Table 3.3 shows the percentage change of the nominal indices for all three groups of commodities with a window of four years before and after, when applicable (as in Tables 1 and 2). Note that the column for oil is centred on 1974, which was when the big jump occurred for that product, not on 1973, the year that applies to agriculture and metals. The prices of oil and agricultural products declined in 1975 compared to 1973 (the observations t+1 for oil and t+2 for agriculture), but the prices of metals continued above 1973 levels (however, compared to the peak in 1974, the t+1 observation, they declined afterwards; see Figure 3.4). The jump in agricultural prices in the 2000s is smaller than that for oil in any annual window, but for metals this is so only in the three- and four-year windows (i.e. the run-up in agricultural prices started later than for other commodities and did not go so far up). Also, the latest jump in nominal oil prices is smaller at

58

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any time window than the one in the 1970s (within one year, for example, the price increase in 2008 is about one-fifth of that in 1974). Metals, in turn, followed their own path, with price increases during the 1970s before and after 1973, but which do not seem to have been as big (percentage-wise) as the current price increases. The behaviour of metal prices during the current inflationary cycle appears to have helped to improve the terms of trade of several developing countries, particularly in Africa and Latin America, which are metal producers and exporters. This observation, combined with the one about the behaviour of the price of beverages, should caution against analyses that focus only on the impact of high food prices, because a proper assessment of possible impacts should consider the whole constellation of commodity prices (see Díaz-Bonilla 2008).

Commodity prices (real) To place the developments in perspective, it is always useful to see the evolution in the indices for inflation-adjusted (or real) prices. Figure 3.5 shows all three indices as does Figure 3.3, but now deflated by the US Consumer Price Index (CPI) (using other deflators such as the manufacturing unit value of industrialised countries’ exports tells broadly the same story). The different behaviour of the prices of metals and oil in the 2000s, which took off earlier and more strongly than those for agriculture, is apparent. It is also important to note that real prices for agriculture and metals, but not oil (at least as deflated by the US CPI) are clearly below the values of the 1960s and 1970s. Table 3.4 provides a more disaggregated perspective, showing the real prices for some agricultural products both as average values by decade and as the maximum monthly level attained. It is clear that, in real terms, prices up to mid-2008 had reached neither the average levels of the 1960s and 1970s, nor the maximum levels of those decades and the 1980s as well. Deflating by the US CPI gives the purchasing power, against a specific consumption basket, of the commodity whose nominal price is so adjusted. But it does not say anything about the costs of producing such a commodity. In the case of agricultural goods, an indicator of the relation between revenues and costs is given by the ratio of the prices of the product to the price of fertilisers. Figure 3.6 shows this ratio for wheat, corn, rice and soybeans. In the first half of the 1970s, the prices of agricultural goods jumped somewhat earlier than did those for oil, which

1 19 11 57 1 M 95 9 8 1 M 960 7 1 M 962 5 1 M 964 3 1 M 966 1 1 M 96 11 8 1 M 96 9 9 1 M 971 7 1 M 973 5 1 M 975 3 1 M 977 1 1 M 97 11 9 1 M 98 9 0 1 M 982 7 1 M 984 5 1 M 986 3 1 M 988 1 1 M 99 11 0 1 M 99 9 1 1 M 993 7 1 M 995 5 1 M 997 3 1 M 999 1 2 M 00 11 1 2 M 00 9 2 2 M 004 7 2 M 006 5 20 08

M

M

4.5 5

3.5 4

2.5 3

1.5 2

0.5 1

0

Oil

Figure 3.5. Real indices (CPI deflated) Metals Agriculture

eugenio d Í az-bonilla

60

Table 3.4. Real prices: US$/tonne (constant US$ of January 2008) Wheat

Corn

Rice

Soybean

Soybean oil

Soybean meal

Average 1960s 1970s 1980s 1990s 2000s 1973/74 2008

412.0 471.9 308.8 210.4 190.5 715.4 373.4

344.9 381.1 233.7 159.5 128.8 513.8 235.6

1053.6 1142.2 618.2 403.5 295.5 1863.2 720.7

660.2 824.6 488.9 322.0 266.0 1176.6 490.4

1298.6 1662.8 1002.3 719.4 603.1 2361.7 1280.6

515.1 680.9 419.9 292.4 244.7 1007.0 382.8

Maximum 1960s 1970s 1980s 1990s 2000s

491.0 985.1 481.5 353.3 434.7

401.7 626.3 368.8 275.0 277.0

1582.2 2763.6 1246.8 525.4 997.5

850.4 2058.2 826.7 421.9 532.5

1917.6 3634.8 1685.1 940.2 1364.4

607.1 2506.2 747.7 428.5 421.6

gave a very favourable ratio for agriculture in 1973, although it collapsed in 1974 after the full oil price shock. During the latest episode, however, the ratio was not very favourable to these agricultural products and it dropped even further in the first half of 2008. This suggests that in the latest episode the fact that the price of fertilisers was rising in parallel with the price of energy (which started increasing throughout the 2000s, earlier than agricultural prices), provided a cost-push reason for the jump in agricultural prices, besides the other usual demand and supply causes that have been mentioned in the explanations for the current episode.

Preliminary summing up So far, it seems that the current food price shock (whose full extent and development is not yet clear) is smaller, in the aggregate, than the previous one. The exception seems to be rice, for which the price jumps in 2008 exceeded those in 1973 (although we need to know how the year ends to be able to make a proper comparison). Also corn, beyond the one-year window, seems to be suffering greater inflationary pressures this time, which is in line with the link to ethanol and oil prices, and the

1 1 M 96 5 7 1 M 96 9 8 1 M 96 1 9 1 M 97 5 1 1 M 97 9 2 1 M 97 1 3 1 M 97 5 5 1 M 97 9 6 1 M 97 1 7 1 M 97 5 9 1 M 98 9 0 1 M 98 1 1 1 M 98 5 3 1 M 98 9 4 1 M 98 1 5 1 M 98 5 7 1 M 98 9 8 1 M 98 1 9 1 M 99 5 1 1 M 99 9 2 1 M 99 1 3 1 M 99 5 5 1 M 99 9 6 1 M 99 1 7 1 M 99 5 9 2 M 00 9 0 2 M 00 1 1 2 M 00 5 3 2 M 00 9 4 2 M 00 1 5 2 M 00 5 7 20 08

M 4.5 5

3.5 4

2.5 3

2

1.5

1

0.5

0

Price Wheat/Fertilisers

Figure 3.6. Ratio price crops/price fertilisers Price Corn/Fertilisers Price Soybeans/Fertilisers Price Rice/Fertilisers

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fact that the price of energy has been accelerating since the early 2000s. It should also be noted that agricultural prices in real terms are not even near the levels of the 1960s and 1970s and that the ratio of product prices to the cost of fertilisers has not been favourable to agriculture. Moreover, agricultural prices cannot be looked at separately from developments in other commodities. Both oil and metals have experienced important increases in prices during the 2000s, and although nominal oil prices did not jump in 2008 as much as in the 1970s (whereas those of metals increased in the late 2000s more than in the 1970s), in real terms both oil and metals reached new highs (which has not been the case for agriculture). All this suggests that we need to look beyond agriculture to understand the evolution of prices both in the 1970s and the 2000s. This is done in the next section.

3.

A broader view of commodity price cycles and trends

The previous sections showed that world prices for commodities have experienced significant changes over the past five decades. To characterise these developments properly it is important to distinguish cycles (with spikes and troughs) from trends. Among the spikes, the 1973–1974 jump in prices clearly stands out, while the current episode of 2007–2008 (still evolving) takes second place. Behind these cycles and trends, there have been different combinations of macroeconomic, structural and temporary reasons. First I discuss the background for the 1973–1974 event and its aftermath. Then, the run-up to the current price spike is analysed, and I speculate about the possible trend and cyclical consequences.

The run-up to the price events of the 1970s The 1960s and 1970s were years of strong growth (both in developed and developing countries), moderate inflation, low (and even negative) real interest rates, accelerated expansion of trade, and high real prices of commodities (see Table 3.5 and Figures 3.5 and 3.7). The economic buoyancy of those years was based on expansionary Keynesian macroeconomic policies in the US (linked to the expansion of the welfare state and the Vietnam war) and in many other countries. Stable exchange rates among the main industrialised countries under the Bretton Woods system, coupled with the liberalisation and increase of world trade as a result of the success of the sequence of General

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Table 3.5. World macroeconomic indicators Indicator World GDP growth (% per year) GDP per capita growth (% per year) Trade growth (% per year) Trade as a share of GDP (%) Developing countries Total growth (% per year) Per capita growth (% per year) Share in recession (%) Capital inflows (% GDP) Consumption volatility Inflation (% per year)a Industrialised countries Developing countries Interest rates (%) Nominalb Realc

1960s

1970s

1980s

1990s

2000s

5.4 3.4 7.6 24.5

4.0 2.1 6.4 32.2

3.0 1.3 4.7 37.6

2.7 1.2 6.2 41.3

3.0 1.7 6.7 48.6

4.9 2.7 28.5 na 0.91

5.3 3.1 29 1.25 0.78

3.4 1.4 40.6 1.06 1.03

3.4 1.8 35.8 1.44 0.80

5.2 3.9 18.9 1.11 0.64

4.9 4.9

8.7 16.2

6.2 36.7

2.8 36.1

2.0 5.8

6.0 1.0

8.4 −0.3

10.6 4.1

5.5 2.7

3.2 1.1

Notes: Growth is aggregated at market exchange rates. Consumption volatility data represent a median of the five-year rolling average of standard deviation/ average growth for developing countries. For the 1960s, data cover various years. For the 2000s, data on GDP, trade growth, interest rates, and inflation are for 2000–2006. a Consumption index. b London Interbank Offered Rate , 6-month dollar deposits. c Using industrialised-country inflation rates. na, not available. Sources: World Bank (2007); IMF (2007).

Agreement on Tariffs and Trade (GATT) rounds of trade negotiations, also added to world growth. Latin America and the Caribbean (LAC), Africa, and the Middle East were the fastest-growing regions in the 1960s, and they continued to grow strongly during the 1970s, although East Asia began to overtake all developing regions in that decade (see Díaz-Bonilla 2008 for a more detailed discussion of these trends). Rents from natural resources financed, to various degrees, the development of the industrial sector and the expansion of the welfare state in many developing countries.

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64 7 6 5 4 3 2 1 0

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 World (Growth %)

Trend

Figure 3.7. World growth Source: World Bank (2007) and IMF projections for 2008.

In summary, synchronised and strong growth across a variety of industrialised and developing economies sustained global demand for commodities. In the early 1970s these expansionary policies led to accelerating inflation. The US abandoned the Bretton Woods system of fixed exchange rates in the first half of the 1970s, and nominal and real exchange rates in major countries became volatile. In particular, the US dollar underwent a cycle of depreciation in the 1970s (see Díaz-Bonilla 2008 for a more complete description of the US dollar cycles). A depreciating dollar also contributed to higher commodity prices (see for instance Mundell 2002). Besides strong growth, a depreciating dollar, and expanding inflationary pressures, the jump in agricultural prices was also related to poor weather conditions in many parts of the world (a cyclone in Bangladesh in 1970; a long drought in sub-Saharan Africa; partial failure of the Soviet cereal crop in 1972; floods in India) and a hike in fertiliser prices, partly due to problems with Morocco’s industry. As discussed in section 2, agricultural prices jumped by over 70 per cent in 1973 (and those of food by about 80 per cent), but other commodity prices also increased significantly. In the case of oil, it happened in 1974 (the year after the sudden increase in agricultural prices), and was also

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related to geopolitical developments in the Middle East and the Yom Kippur War. In 1974 and 1975 the global economy suffered a significant slowdown, with many industrialised economies showing negative growth and close to 40 per cent of the developing countries also in recession. After the first oil crisis, developed countries tried to fight the slowdown with expansionary fiscal and monetary policies. The 1978 Bonn Summit reiterated the intention of industrialised countries to maintain pro-growth policies. This approach only exacerbated inflationary pressures and eventually led to a more drastic tightening in the 1980s. In the case of the developing countries, the notion of recycling petrodollars was promoted by the international community as part of the general effort to maintain world aggregate demand, which allowed many developing countries to borrow against ample export revenues supported by high commodity prices. All these policies contributed to world growth and inflation in the late 1970s, and set the stage for the dramatic changes in the monetary policies of the industrialised countries and the developing countries’ debt crises of the 1980s.

The aftermath of the increases in commodity prices and inflation of the 1970s After the second oil shock in the late 1970s, a series of elections in key industrialised countries brought new governments that changed the focus of policies from trying to sustain growth through Keynesian measures to fighting inflation using monetarist approaches. Nominal interest rates were raised substantially above inflation rates, leading to high real interest rates (10.6 per cent and 4.1 per cent, respectively, on average for the 1980s, with a peak of about 6–8 per cent in real terms in the early 1980s; see Díaz-Bonilla 2008). This policy change led to the recession of the early 1980s: in the five decades considered here, world growth in 1982 was the lowest (see Figure 3.7). The deceleration of the world economy in the early 1980s did not cause an immediate decline in the prices of commodities for two reasons, one related to agricultural commodities and the other to oil. Regarding agricultural commodities, the US Farm Bill of 1980, in expectation of levels of inflation that did not materialise, established high nominal values of domestic support prices. Because of the way in which the US Department of Agriculture managed and accumulated stocks, that Farm Bill acted as a demand buffer, providing support to real world prices. The situation was modified significantly in the 1985

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Farm Bill, which began to unload onto world markets the stocks previously accumulated and started an export subsidy trade war with the European Union, depressing the world prices of many agricultural products. In the case of oil, from early 1982 to late 1985 the Organization of the Petroleum Exporting Countries (OPEC) imposed supply restrictions, with Saudi Arabia acting as a supply buffer. That arrangement had broken down by early 1986 because of increased production in countries outside OPEC, particularly linked to the discovery of oil in the North Sea; this eroded discipline among the members of the cartel, leading to increased OPEC supply (Kilian 2006). In summary, weakness in world demand meant that when the US stopped acting as a demand buffer for agricultural products and Saudi Arabia decided not to function as a supply buffer for oil, the result was a generalised decline of commodity prices in the mid-1980s. In the case of agricultural prices, besides slumping world growth, declines in the 1980s were also associated with: *

* * * *

expanded public support for agricultural production, mostly in industrialised countries – particularly the European Union through the Common Agricultural Policy and the USA through the above-mentioned changes in the US Farm Bill of 1985 – but in the late 1970s and early 1980s also in several developing countries, which embarked on large programmes to increase agricultural production, in many cases heavily subsidising the sector, that later proved unsustainable when conditions reverted to normal; the 1980s debt crises in developing countries; the agricultural transformation in China; the expansion of the Green Revolution in many developing countries; and the break-up of the Soviet Union.

All these developments added to the supply side and/or weakened the demand side of agricultural markets, leading to the collapse of agricultural prices in the mid-1980s (see Borensztein et al. 1994 and DíazBonilla 1999). In the case of oil, other factors, such as technological change that allowed deep-sea drilling, and more energy-saving processes, cars, and appliances, also changed the supply–demand equation toward softer prices. Overall, the world moved to a slower rate of economic growth after coming out of the recession of the early 1980s – a shift that in part can be

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attributed to the economic consequences of the previous period of high growth and inflationary pressures both in developed and developing countries – and most commodities entered the decade of the 1980s with expanded supply capabilities created not only by market forces, but also by policy decisions, in reaction to high prices. The consequence was that the real price of commodities continued to decline into the 1990s. In the case of agricultural products, industrial countries continued with their programmes of protection and subsidisation, while in many developing countries these were dismantled as part of IMF- or World Bank-supported programmes. Also, most of the International Commodity Agreements that were started in the late 1970s with the expectation of stabilising prices were discontinued (see Gilbert 1996).

Towards the price spike of the 2000s After the collapse in the mid 1980s, real prices of most commodities dropped to about half the levels of the 1960s and 1970s, or less, and remained low for much of the 1990s (see Figure 3.5; metals in the late 1980s were a brief exception). From early 1994 to mid-1995, the US monetary authorities initiated a period of tightening, increasing the federal funds rate by about 300 basis points. The dollar, which had weakened in the preceding years during the period of slow growth and low returns on assets, changed course and began to appreciate. Various middle-income countries that have currencies pegged to the dollar, particularly in LAC and Asia, began to lose external competitiveness. However, resorting to devaluation to restore competitiveness was not that simple given the level of indebtedness in hard currency and the impact that such devaluation would have on the balance sheet of debtors and on the financial sector that had intermediated these hard-currency loans. The main difference from the crises of the 1980s (when international banks intermediated petrodollars mainly to the public sector) was that in the 1990s an increasing component of external debt was held by the private sector. Devaluations were eventually forced by the reversal of capital flows to developing countries, and a second wave of debt crises erupted in developing countries, first in Mexico in 1995 and then in East Asia (1997), Russia (1998), Brazil (1999), and Argentina (2001). This sequence of financial crises in developing countries eroded the demand side of many commodities, and devaluations in producing countries, such as Brazil and Argentina, expanded the supply of several of them. The unravelling of the technology boom in the US and other

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industrialised countries, and the events of 11 September 2001, led to the slowdown in the early 2000s in the US and world economies. These changes in supply and demand combined with an appreciating dollar, which reached its peak in the early 2000s, to force commodity prices to the lowest nominal levels in decades, and to the absolute lowest real values for the whole period for which data on them had been collected. However, there were several developments at the global level that, incipiently in the mid 1990s, and with full force once the world slowdown of the early 2000s was over, began to impart an increasingly expansionary tilt to macroeconomic policies worldwide. The millions of workers incorporated into the global economy due to the policy changes in China and the end of the Cold War put downward pressure on salaries and the prices of manufactured goods, helping to reduce inflationary trends. This, in turn, allowed central banks in industrialised countries to pursue more expansionary monetary policies. In the case of the US, the easing of monetary conditions started because of concerns about the impact of the change to the year 2000 (the millennium bug) on computers, and was reinforced after the dot.com collapse and the terrorist attacks of 11 September 2001. Nominal rates were kept until 2004 at low nominal levels not seen since the 1950s, and even then interest rates had been held down for shorter periods than now in the 2000s (see Díaz-Bonilla 2008). This strong (and, some have argued, exaggerated) monetary impulse eventually led to the economic acceleration that the US and the rest of the world have experienced in the 2000s. That expansionary monetary policy was further reinforced by significant increases in private leverage (i.e. the amount of credit and debt built over a given level of incomes and capital). This increase in leverage was based on a lower perception of risk, fostered by: *

*

the relatively low volatility and high growth that the world had experienced since the mid-1990s, which some have dubbed the ‘Great Moderation’ (see among others Bernanke 2004); and technological innovations in credit instruments that seemed to reduce risk (such as credit default swaps) or to disperse it in a more manageable way (such as securitisation and tranching of assetbacked instruments).

A related development has been the emergence, during the past decade, of a parallel banking and financial structure (which some have called ‘the shadow banking system’) that has been borrowing short term and lending long term using securitised financial vehicles at both ends

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(Hamilton 2007). These operations, which used securitised financial instruments (some of which were based on housing mortgages) instead of deposits and loans, were a way of avoiding strict capital conditions and regulations and were supposed to remain off the banking sector balance sheet. That parallel system amplified the availability of liquidity, which was already ample because of Federal Reserve policies, providing further support to growth in the US and the rest of the world. The consequence of the decline in the individual perception of risk by economic agents was that the system as a whole took on much more risk than had been previously understood. Increases in leverage led to two bubbles in the 2000s: in the housing and stock markets (the latter being a somewhat milder repeat of the stock market bubble of the late 1990s). Monetary policies were also expansionary in developing countries. China maintained a semi-fixed exchange rate regime with the US dollar, which generated current account surpluses and accumulation of reserves, expanding its own domestic money supply and accelerating growth. The Chinese reserves were invested in dollar-denominated instruments, mostly US public bonds, contributing to the reduction of the longer-term interest rates. This arrangement was dubbed Bretton Woods II by some (see Dooley et al. 2003). A similar mechanism operated in certain Asian and Latin American countries, which, in order to avoid the disruptions caused by the financial crises of the 1990s, accumulated reserves in their central banks, expanding their money supply, and invested those reserves outside their countries, in many cases in dollar-denominated assets, also putting downward pressure on interest rates. More recently, oil producers (and to a lesser extent other producers of commodities), benefiting from the increase in the prices of their products, also accumulated reserves, with similar internal and external monetary consequences. By keeping longer-term interest rates low, these capital flows contributed to the bubbles of the housing and stock markets. Developing and emerging countries (plus Japan) became net exporters of capital, which went mostly towards the US, and the current account of the US, which had briefly gone back into equilibrium during the recession of the early 1990s, started a sustained process of growing external deficits in the mid-1990s, which continued until it reached the record level of more than 6 per cent of the US gross domestic product (GDP) (Farrell et al. 2007). The continuous expansion of the US trade deficit (reflected in the widening current account deficit) and low interest rates supported global growth. This, in turn, began to push up the nominal and real prices of several commodities, particularly metals and energy.

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The devaluation of the US dollar since the early 2000s also added pressure to the prices of commodities. For agricultural goods, besides the resumption of world growth and the greater demand from developing countries, higher nominal prices have also been influenced by competition with crops grown for use as energy sources (which in addition are subsidised in the main industrial countries), and by weather patterns (von Braun 2007). The very accommodative US monetary policy began to be reverted by mid-2004, setting in motion the events that led to the housing and related credit events of 2007 in several industrialised countries: the housing market peaked in early 2006 and started to decline sharply, while the stock market peaked in late 2007 and then moved downwards. Critics of Federal Reserve policies have argued that keeping rates so low for so long created the necessary conditions for the rise of the housing bubble and its subsequent bursting when monetary policies had to be tightened because of inflationary pressures (Taylor 2007). Clear signs of financial distress in mid-2007 led to a strong change in the monetary policy of the Federal Reserve towards a more expansionary stance. The large increases in commodity prices since the second half of 2007 appear to have been influenced by such monetary easing (Frankel 2006), which at that time led to fears of inflation and a decline in the US dollar, prompting investors to turn to commodities as inflation hedges, in a context where alternative investments in stocks and other assets did not show good returns. This was combined with declining inventories in a series of commodities to generate the large price increases. Changes in the trade policies of several key countries also contributed to the run-up. Still, most real prices, as already mentioned, stayed below the 1970s levels. By mid-2008, financial stress was evolving into a full-blown financial crisis. The new instruments that were supposed to disperse risk did so in a way that made it very difficult to assess where the bad credit was. Economic agents fled to the most liquid assets (cash, guaranteed deposits, and short-term US Treasury bills), forcing the liquidation of other assets. Regulatory capital by the banking system had shrunk because of mark-to-market requirements,2 enforced by legislative changes such as the Sarbanes–Oxley Act passed after the collapse of Enron. The bursting 2

Mark-to-market refers to the accounting requirement that assets be priced at the values prevalent in the markets at the time of closing the financial books, instead of using historical values, such as the price paid when such an asset was originally bought, or other valuation conventions.

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of both bubbles and the tangled and opaque network of financial instruments created around them placed the banking system under stress, generating the equivalent of a run on investment banks and the ‘shadow banking system’ (Hamilton 2007). A credit crunch ensued. This drama is still unfolding. A strong world deceleration in 2009, possibly extending until 2010, appears unavoidable. Once the coming recession is over, as part of the perennial business cycle, the issue of the medium-term trend for commodity prices will reappear. The next section speculates on those future cycles and trends for commodity prices.

The aftermath of the 2007–2008 price event: cyclical considerations How will the 2009–2010 recession look, and what are the implications for food prices? To give a sense of the possible scenarios, it is useful to look back at the world’s four strong decelerations (‘recessions’3) since the 1960s: namely those in 1974–1975, 1980–1982, 1991–1993, and 2001– 2002 (Figure 3.7). Each of these events was associated with a recession in the US. What happened during those years? Tables 3.6–3.9 show the difference between the average value of the variable of interest for the three years before the crisis (Xt – 3) and during the crisis (Xt). For instance, using GDP growth, if this was on average 3 per cent in the three previous years and declined to –2 per cent on average during the years of the crisis, then the reported variable is –5 per cent (–2 per cent plus –3 per cent). The variables are GDP growth per capita, prices of commodities, interest rates, and the US multilateral real exchange rate. In terms of GDP growth (per capita), economic declines appear to be generalised, except in the case of the early 1990s (Table 3.6). The LAC region, which had suffered its own recession somewhat earlier, was already rebounding from those lows by the early 1990s; but excluding LAC, the aggregate for the other regions (not shown) was negative. The behaviour of interest rates can also be separated into two main cases (Table 3.7). During the recessions or decelerations of the mid1970s and early 1980s, inflation was an issue and there was a tightening of monetary policy (more in the 1980s than in the 1970s). By contrast, in the 1990s and 2000s, interest rates were cut to counter the slowdown 3

The quotation marks indicate that negative growth never occurred at the world level, although the cycles are clear in Figure 2.

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Table 3.6. Change in growth in GDP per capita during recessions (per cent) Region

1974–1975 1980–1982 1991–1993 2001–2002

Low- and middle-income countries High-income countries United States World

−0.5

−1.7

0.1

−0.2

−4.7 −5.1 −4.1

−3.0 −4.2 −2.8

−2.2 −1.6 −1.7

−1.8 −2.8 −1.4

Source: Calculations by the author based on data from World Bank (2007).

Table 3.7. Changes in interest rates during recessions (per cent)

3-month US LIBOR 1-year US LIBOR Federal funds Treasury bill 3-year government bonds 10-year government bonds Bank prime loan rate

1974–1975

1980–1982

1991–1993

2001–2002

1.8 na 2.2 1.7 1.5 1.4 3.0

5.8 3.9 5.8 4.6 4.7 4.4 6.8

−4.1 −4.0 −4.2 −3.5 −2.8 −1.7 −3.2

−3.1 −3.0 −2.7 −2.6 −2.0 −0.8 −2.7

Note: LIBOR, London Interbank Offered Rate; na, not available. Source: Calculations by the author based on data from IMF (2007).

created by a specific overinvestment cycle that was unwinding (in the first instance related to housing, as is currently the case, and in the second event to technology investments). Table 3.8 shows indices of nominal prices for groups of commodities, plus (in the bottom row) the index of export prices for developing countries (low- and middle-income countries as defined by the World Bank). The behaviour of commodity and export prices can be separated into two main cases. During the first two recessions, most (but not all) commodity prices were increasing, in line with the oil shocks and generalised inflationary pressures. During the two most recent events prices were declining, with the exception of that of oil in 2001–2002, which, although negatively affected in the late 1990s by the sequence of financial

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Table 3.8. Change in commodity prices during recessions (per cent) 1974–1975 1980–1982 1991–1993 2001–2002 Food Beverages Agricultural raw materials Metals Average crude price Low- and middle-income countries

6.7 −21.7 −1.0 14.4 99.5 10.4

10.5 −30.0 −10.4 18.8 83.8 1.1

−7.1 −24.2 −0.5 −26.9 −0.8 −12.4

−8.7 −38.0 −5.3 −7.6 46.9 −20.3

Source: Calculations by the author based on data from IMF (2007).

crises in developing countries, was already rebounding by the early 2000s, propped up by diverse geopolitical events. During the second half of 2007, characterising the coming world recession was made difficult by the convergence of both inflationary pressures (requiring monetary tightening, as in the 1970s and 1980s) and an unwinding investment cycle with widespread fragility of the banking and financial systems in the US and other countries (requiring monetary easing, as in the 1990s and 2000s). While the Federal Reserve turned to a more expansionary monetary policy (which had an impact on the US dollar and inflationary expectations, leading to higher commodity prices), the European Central Bank took a stricter line against inflation. The continuous deterioration of the financial system in many industrialised countries, particularly the US, has significantly changed the approach of the governments towards the current financial crisis. While originally the crisis was treated as one of liquidity to be handled with traditional monetary instruments, the approach has changed towards the creation of numerous non-traditional instruments to provide liquidity. And, more recently, and faced now with issues of insolvency and the possibility of a systemic collapse in the financial sector of the industrialised countries, governments have resorted to a variety of guarantees, direct capital injections, public takeovers, and orderly bankruptcy arrangements. All these policy changes will moderate, but will not avert, a recession in the US and other industrialised countries. Will developing countries, which are growing fast, be able to sustain the economic activity for the world as a whole? This seems doubtful, given that

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the proportion of world GDP of developing countries (at market rates) is about twenty-five per cent (see Díaz-Bonilla 2008). Furthermore, the extent and impact of the current credit crunch, which may be expanded in unexpected ways by the globalisation of finances, is now engulfing emerging developing countries that until mid-2008 appeared unaffected. Therefore a further softening of commodities prices, which had already declined in late 2008 from the soaring levels of early 2008, should be expected. How much lower? Just as an example: if the declines in prices of the last two recessions are any indication, soybeans, for instance, could go from a maximum of about US$ 550/tonne in early 2008 to about US$ 270–300/tonne in 2009–2010; wheat from some US$ 440/tonne to US$ 235–245/tonne; and corn from about US$ 285/tonne to US$ 155–165/tonne. These values are not as low as those in 1999–2001 (when there was a ‘perfect storm’ of slow global growth, financial crises in developing countries, and an appreciated dollar), but they are clearly lower than the high levels of late 2007 and early 2008, and also below most of the projections that do not include the coming global slowdown (OECD–FAO 2008). An important unknown is the eventual emergence of negative supply shocks, related to weather for agricultural products or to geopolitical developments in the case of oil, which could dramatically change the projections of commodity prices for 2009–2010. In any case, there is some good news for developing countries: when the situation is compared with that of the 1970s, the developing countries appear to have been following more prudent policies than in the previous cycle of euphoria that ended in debt crises in the 1980s. In general, although with varying success, they have tried to: *

*

*

strengthen the fiscal position of the public sector, reducing public sector debt ratios, and even using additional resources from high commodity prices to create countercyclical funds (a stronger fiscal position of the public sector will be needed to set up safety nets for the poor and vulnerable during the coming slowdown); avoid rigid and appreciated real exchange rates that could lead to trade imbalances and excessive accumulation of external debt; and maintain high levels of reserves in the central banks as a precaution against possible global turbulence that could lead to declines in growth and commodity prices and could stop or revert capital flows to developing countries.

However, even if this downturn is properly managed, developing countries face more difficult challenges for economic development and poverty alleviation in the medium to long term. This is discussed next.

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The aftermath of the 2007–2008 price event: possible trends Once the downturn of 2009–2010 is over, the trend for food prices will depend (in addition to the usual impact of population growth, urbanisation and related consumption patterns) on the level of expected growth and the more complex links between agriculture and energy (including technological developments). Regarding the first issue (growth), the central scenario for the medium term is one in which the industrialised economies, and particularly the US, resume growth some time in late 2009 or, most likely, 2010. But this growth will be lower than since the mid-1990s, leading to overall lower world growth, at least during the first half of the next decade. There are several reasons for this scenario. First, industrialised countries will have to resort to fiscal adjustments after the increase in public expenditures and debt to support the financial sector and the economy. Also, they will have to reverse the expansionary monetary policies followed so far. Second, consumers, especially in the US, who increased their debt ratios during the 1990s and 2000s will have to save and reduce those ratios to more manageable levels. Third, the financial sector emerging from this crisis will be more regulated, use less leverage, and, it is hoped, will be more prudent in its financial practices. All in all, expenditure adjustment in the public and household sectors in the US and less abundant credit will lead to lower US trade deficits, and the world will no longer have the consumption engine that has propelled growth during the past two decades. A second scenario in the medium term is also possible, but is less likely than the previous one, if countries remember their experiences of the second half of the 1970s. Then, as has been noted, industrialised countries countered the 1974 oil shock with expansionary macroeconomic policies that led to further inflationary pressures in the late 1970s, and a complete policy reversal in the 1980s, forcing a deep recession. Now, if the current expansionary fiscal and monetary policies in the US and other industrialised countries are not promptly adjusted once the worst of the current economic crisis is over, a scenario in which inflation explodes in three to four years, forcing a drastic monetary contraction, could materialise. Leaving aside macroeconomic developments, and moving now to the consideration of longer-term trends, the main challenges appear to be linked to the interaction of energy, agriculture, the resource base, climate change and the environment. This complex set of issues affects various dimensions of the development and poverty equation (Figure 3.8).

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eugenio d Í az-bonilla Climate and Environment

Energy *World Sustainable Energy *Energy and Poverty *Energy and Food Security *Energy and Health

Resource Base

Agriculture

Figure 3.8. Energy, agriculture, environment, and poverty

In the longer term, the requirements are daunting. Table 3.9 shows the evolution of population, GDP, and non-food and food energy requirements from the 1950s–1960s to 2004, with long-term projections for 2050 under some variations of current trends. The three data points are separated by about half a century. Table 3.9. Energy, population, and GDP

Population (million) GDP (million US$, 1990) Non-food energy (exajoules) Food energy (exajoules)

1950–1960

2004

2050

2500 5300 90 10

6400 36000 460 28

9000/10000 105000/115000 800/900 39/43

Source: Díaz-Bonilla (2008).

Regarding primary agricultural prices, during the 1970s, the effects of energy prices were felt mostly through the costs of production (through inputs such as fertilisers and fuel oil), while prices to consumers were also influenced by transportation and processing costs. Now the energy–agriculture equation is more complex: in addition to the same production, transportation and processing links, we have two additional channels. The first is the competition for land, water, labour, capital and inputs in the production of biofuels. The second is the impact on climate change of the energy matrix. While the previous episode of high oil prices led to new oil discoveries, such as in the North Sea, simply following a fossil-based growth strategy based on new sources (such as Canada’s oil shale) is no longer feasible given the climate change constraints.

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The combination of issues surrounding energy use, economic development, poverty alleviation, and climate change is affected by a market coordination failure of global proportions (Stern 2006), and, as with the shorter-term macroeconomic imbalances discussed above, there are no widely accepted international mechanisms for resolution of this problem.

4.

Final reflections

During the past half-century agricultural prices have shown a declining trend in real values, against which there have been cycles in nominal values including some significant spikes in 1973–1974 and, somewhat less, in 2007–2008. In this chapter, I have tried to compare the price spikes of the 1970s and the 2000s, analyse the macroeconomic and other policy reactions, and speculate about future scenarios for the short and long term. The positive cycles and spikes in commodity prices have been associated with strong growth, expansionary monetary policies and a weak dollar, which led to demand growing faster than supply and to reduced stocks, combined with some idiosyncratic negative supply shocks – most likely related to weather, in the case of agriculture. Conversely, with slow growth, tight monetary policy and an appreciating dollar, positive supply shocks and/or negative demand shocks (such as the financial crises of the second half of the 1990s leading to devaluations in key exporters and curtailed demand in key importers, among developing countries) led to collapses in prices. Clearly, in 1973–1974 the nominal price shocks were larger than in 2007–2008, and were more synchronised across commodities. Policies in the 1970s seem to have exacerbated inflationary pressures and debt accumulation, which led to the recessions and debt crises of the 1980s. These policies also expanded productive capacity for commodities based on projected demand that did not materialise, leading to two decades of low real prices. The current episode was also based on global expansionary policies and increased leverage that led to price pressures. As in the 1970s, there were expansionary monetary policies and a depreciating dollar, whose effect on prices was compounded by weather shocks and the policy ‘shock’ represented by the US and EU mandates on biofuels. Now, however, and unlike in the 1970s and 1980s when the downturn resulted from a policy decision to stop inflation, the coming recession is

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the endogenous consequence of a boom-and-bust cycle of private overinvestment in industrialised countries. These countries are countering the economic decline with expansionary policies and unprecedented interventions in the financial sector. Developing countries seem to have followed more prudent policies in this episode, but they will not be spared from the coming global recession. Therefore, the issue of high food prices will fade away in the immediate future. However, if economic authorities are too successful in battling recession, or take too long to revert to stricter macroeconomic policies once the threat of recession disappears, it is possible that the world will see a repeat of the inflationary problem of the late 1970s and a more drastic tightening of policy will become necessary. Once the coming recession is over, the path of agricultural prices will be more interlinked than ever with energy prices and energy sources. As noted above, in the 1970s energy affected agricultural prices only as an input to the production, processing and transportation of agricultural products. Now, the links are more complex. The simple way out that was taken in the 1970s and 1980s when high prices and new technologies brought new sources of oil supply into production is no longer feasible, given climate constraints. Therefore, for the longer term, the prospects for commodity prices, and more importantly for economic development and alleviation of poverty and hunger in developing countries, are directly tied to the appropriate resolution of a central problem for humankind: how to make sure that the world’s population has adequate access to sustainable energy resources, including food production as a source of human energy. The world has neither a global institutional and legal system to address in a coordinated fashion the financial problems now affecting its economy, nor the institutions to handle properly the long-term issue of how to put the world on a sustainable development path. In institutional terms, the latter issue requires globally coordinated work on the successor treaty to the Kyoto Agreement. It is crucial that developing countries undertake the necessary policy analysis to prepare for those negotiations and to make sure that their interests are represented. Another important factor is international financing for the investments in technology, infrastructure and institutions dealing with agricultural production, clean and sustainable energy and transportation, energy efficiency, adaptation to climate change, and protection of natural resources. If the current increase in commodity prices (now receding) serves to spur nations to address these crucial problems it will have served a higher purpose.

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References Bernanke, Ben S. 2004. ‘The Great Moderation’, Remarks at the meetings of the Eastern Economic Association. Washington, DC, 20 February (www. federalreserve.gov/BOARDDOCS/SPEECHES/2004/20040220). Borensztein, Eduardo, Khan, Mohsin S., Wickham, Peter and Reinhart, Carmen 1994. ‘The Behaviour of Non-oil Commodity Prices’, Occasional Paper No. 112. Washington, DC: International Monetary Fund. Díaz-Bonilla, Eugenio 1999. ‘South American Wheat Markets and MERCOSUR’, in Antle, J. M. and Smith, V. H. (eds.), The Economics of World Wheat Markets. Oxfordshire, UK: CABI. ——2008. ‘Global Macroeconomic Developments and Poverty’, IFPRI Discussion Paper No. 00766 (May). Washington, DC: Markets, Trade and Institutions Division, The International Food Policy Research Institute (IFPRI). Dooley, Michael, Folkerts-Landau, David and Garber, Peter 2003. ‘An Essay on the Revived Bretton Woods System’, NBER Working Paper No. 9971. Cambridge, MA: National Bureau of Economic Research. Farrell, Diana, Lund, Susan, Maasry, Alexander and Roemer, Sebastian 2007. The US Imbalancing Act: Can the Current Account Deficit Continue? San Francisco, CA and Washington, DC: McKinsey Global Institute. Frankel, Jeffrey 2006. ‘The Effect of Monetary Policy on Real Commodity Prices’, NBER Working Paper No. 12713. Cambridge, MA: National Bureau of Economic Research. Gilbert, Christopher 1996. ‘International Commodity Agreements: An Obituary Notice’, World Development 24: 1–19. Hamilton, James 2007. ‘Borrowing Short and Lending Long’, Econbrowser, Analysis of Economic Conditions and Policy (www.econbrowser.com/ archives/2007/09/borrowing_short.html). Insel, Barbara 1985. ‘A World Awash in Grain’, Foreign Affairs 63, No. 4: 892–911. International Monetary Fund (IMF) 2007. International Financial Statistics (www.imfstatistics.org/imf/). Kilian, Lutz 2006. ‘Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market’, CEPR Discussion Paper No. 5994. London: Centre for Economic Policy Research. Mundell, Robert 2002. ‘Commodity Prices, Exchange Rates and the International Monetary System’, Presentation to the Consultation on Agricultural Commodity Price Problems, Commodities and Trade Division, Food and Agriculture Organization of the United Nations, Rome, 25–26 March (www.fao.org/docrep/006/Y4344E/y4344e04.htm).

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OECD–FAO 2008. Agricultural Outlook 2008–2017 (www.agri-outlook.org/ pages/0,2987, en_36774715_36775671_1_1_1_1_1,00.html). Stern, Nicholas 2006. Stern Review on the Economics of Climate Change (www.hmtreasury.gov.uk/independent_reviews/stern_review_economics_climate_ change/stern_review_report.cfm). Taylor, John 2007. ‘Housing and Monetary Policy’, Paper presented at the Federal Reserve Bank of Kansas City’s economic symposium, Jackson Hole, Wyoming (www.stanford.edu/~johntayl/Housing%20and%20Monetary% 20Policy–Taylor–Jackson%20Hole%202007.pdf). von Braun, Joachim 2007. ‘The World Food Situation: New Driving Forces and Required Actions’, IFPRI Food Policy Report No. 18. Washington, DC: International Food Policy Research Institute. World Bank 2007. World Development Indicators. Washington, DC: World Bank.

4 Solving the food crisis in Africa: achieving an African Green Revolution akinwumi a. adesina* Introduction The rising poverty and food insecurity in Africa1 is one of the major development challenges facing the world today. While democracy, good governance and accountability through mutual peer-reviewed political processes are gradually taking root, the dividends of democracy have yet to be felt by the majority of the population, especially the rural poor who depend on agriculture for their livelihood. While globally there is a food surplus and prices of food have declined, reducing poverty and hunger in many parts of Asia, Africa remains the only region where malnutrition and hunger spots persist. The Green Revolution that rapidly raised agricultural productivity in Asia and laid the foundation for the accelerated industrial and broader economic growth of the region has bypassed Africa. Meeting the Millennium Development Goals will still be a far stretch for Africa as it is projected that under the current business-asusual scenario it will not be able to meet the goals for another 100 years. This chapter discusses the food crisis faced by Africa and traces the root causes of the low and declining agricultural productivity in African agriculture. It considers the major challenges facing African agriculture, assesses the progress being made in agricultural research, and identifies some of the major reasons why a green revolution has not taken root on the continent, and how Africa can turn its agriculture around to the benefit of millions of poor smallholders. The chapter argues that there is a need for urgent measures to achieve a green revolution in Africa. This will require commitments from African governments, renewed support for agricultural research and a new development-financing framework to provide substantial new resources for African governments. * Vice President for the Alliance for a Green Revolution in Africa; Associate Director, The Rockefeller Foundation, Kenya 1 Africa should be interpreted as sub-Saharan Africa for the purposes of this chapter.

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The role of agriculture in Africa’s economic growth and development Agriculture is critical for economic growth in Africa. Approximately 70 per cent of total employment is in agriculture, and the sector contributes 30 to 50 per cent of national income. Agriculture plays a very significant role in national economic development, especially in the early stages. Agriculture serves many purposes, including the provision of food and fibre, import substitution and conservation of foreign exchange through domestic food production, release of labour into the industrial sector, provision of raw materials for industrial growth, and lowering of food prices, thereby raising real wages and generating employment. In developing countries, growth in agriculture has made the greatest contribution to gross domestic product (GDP) growth per capita. A detailed study of 62 countries found that agriculture’s direct contribution to GDP growth per worker averages 54 per cent compared to 17 per cent for the nonagriculture sector (Gollin, Parente and Rogerson 2002). Agriculture has significant growth linkages with the rest of the economy, especially forward and backward linkages and consumption linkages (Diao et al. 2007). Forward linkages exist because agriculture supplies agricultural outputs and raw materials to the non-agricultural sector, especially for agro-processing and marketing activities. Backward linkages arise from demand for agricultural inputs, finance and other services from the agricultural sector. Consumption linkages occur because the higher incomes in the agricultural sector spur demand for consumer goods and services that are produced in the non-agricultural sector. Therefore, more than in any other region of the world, agriculture plays a major role in national economic development. Industrial growth cannot occur without significantly increasing food production from agriculture. The poor performance of agriculture in Africa is therefore at the heart of its slow economic growth. It is the only region of the world where per capita food production has been declining for the past three decades. Cereal yields in Africa are a quarter of the global average. Africa’s soils are the poorest in the world. At the root of the food problem in Africa is the severe depletion of its soils. Africa’s rate of deforestation is 200 per cent of the global average, according to the Food and Agriculture Organization of the United Nations. Africa loses an estimated 8 million tonnes of soil nutrients per year. Over 95 million hectares of land, or 75 per cent of arable land, have serious soil fertility depletion problems (Henao and Baanante 2006). It is estimated that the continent loses at

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least US$ 4 billion worth of soil nutrients every year (Sanchez and Swaminathan 2005). Feeding the poor and vulnerable populations in Africa, while preserving the natural resource base and the environment, is one of the most pressing development challenges of the twenty-first century. The challenge is serious because population growth rates have exceeded the productive capacity of the continent’s current food systems. The population of sub-Saharan Africa is projected to grow from 600 million in 2000 to nearly a billion by 2020. Dire consequences for food security are predicted. The International Food Policy Research Institute (IFPRI) noted that Africa is likely to continue to be the ‘troubled region’ in terms of imbalance between food demand and supply. Their projections show that Africa is the only region that will experience major food shortages by 2020 and beyond. Malnutrition is predicted to rise over the next 20 years. Because of the poor performance of its agricultural sector, the costs of Africa’s annual food imports are projected to rise from the current US$ 6.5 billion to US$ 11 billion by 2020 and the economic, social and political costs of relying on imported food are high.

Africa faces a deepening food crisis Africa today is witnessing a food crisis. While the extent of this crisis has been brought under the spotlight by the attention on the global food crisis, it needs to be well understood that the food crisis is not new. Africa has been witnessing a silent hunger for the past three decades. The global food crisis has adversely affected low-income food-deficit countries. In Africa, 306 million people live on less than a dollar per day. Many are at risk of falling deeper into poverty traps. The food crisis caught the world by surprise. But for Africa, it should not have been a surprise. African governments had systematically taxed the agricultural sector with policies that favour lower food prices for the politically sensitive urban populations (see Chapter 7). While liberalisation of markets and devaluation of currencies led to greater incentives for farmers, the tradable sectors (cash crops, horticulture) mostly benefited. The food crop sector has continued to be neglected with limited investments in the agricultural research and development, extension, market support systems, rural infrastructure and financing needed to trigger growth. Yet, evidence has shown that the fastest way to achieve rural economic growth and food security is to focus on raising agricultural productivity – especially productivity of staple food crops.

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The global response to the food crisis, especially in terms of new funds for reducing the vulnerability of populations at risk, is welcome. However, these can only be seen as immediate measures. Africa faces huge challenges in producing food to feed its rapidly growing population. The solution to Africa’s food crisis must come from addressing the fundamental cause of the food crisis: low and declining agricultural productivity. Africa must create a balance between ‘food emergencies’ and ‘agricultural growth’ agendas. The next section of this chapter reviews the experience of Asia in addressing its food crisis in the 1960s and 1970s, some of the successes in African agriculture that could trigger the African green revolution, and constraints underlying the perennial low and declining agricultural productivity on the continent.

How did Asia deal with its food crisis in the 1960s and 1970s? Asia faced a crippling food crisis in the 1960s and 1970s. The rapid population growth and low productivity of agriculture posed a nexus of challenges for national governments. Asian countries embarked on a massive programme to raise agricultural productivity for their food crops. Rapid investments were made in agricultural research to develop short-statured, high-yielding varieties of wheat and rice. Governments supported the adoption of fertilisers and invested heavily in irrigation. Price supports were used to raise price incentives for farmers. The result was dramatic: millions of farmers rapidly adopted the new high-yielding varieties of wheat and rice. As yields doubled and tripled, Asia experienced the Green Revolution which turned around the looming food crisis. Governments also supported farmers with massive amounts of subsidy to promote adoption of the green revolution technologies. The rates of return on these investments were very high in the early stages of the Green Revolution, although they have declined since the 1990s (See Table 4.1). The Green Revolution that Asia witnessed bypassed Africa for a number of reasons. First, wheat and rice (the crops of the Green Revolution) are not the major food crops in Africa, where farming systems are dominated by root and tuber crops, sorghum and millet, and other crops. These crops are more difficult to improve than are wheat and rice. Second, Africa has more diverse agro-ecologies than Asia, so one-size-fits-all technical change is impossible to achieve. Third, while Asia had a homogeneous farming system dominated by irrigated systems, African agriculture is dominated by rain-fed systems;

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Table 4.1. Returns on agricultural growth and poverty reduction from investments in public goods and subsidies in different phases of the Asian Green Revolution Returns on agricultural GDP (rupees per rupee spent)

1960s

Road investment Educational investment Irrigation investment Irrigation subsidies Fertiliser subsidies Power subsidies Credit subsidies Agricultural R&D

8.79 5.97 2.65 2.24 2.41 1.18 3.86 3.12

1970s 3.8 7.8 2.1 1.22 3.03 0.95 1.68 5.9

1980s 3.03 3.88 3.61 2.38 0.88 1.66 5.2 6.95

Decrease in the number of poor people per million rupees spent Road investment 1272 1346 295 Educational investment 411 469 447 Irrigation investment 182 125 197 Irrigation subsidies 149 68 113 Fertiliser subsidies 166 181 48 Power subsidies 79 52 83 Credit subsidies 257 93 259 Agricultural R&D 207 326 345

1990s 3.17 1.53 1.41 NS 0.53 0.58 0.89 6.93 335 109 67 ns 24 27 42 323

Source: Fan, Gulati and Thorat 2007.

less than 5 per cent of the arable land is irrigated compared to over 45 per cent of arable land in Asia. Nonetheless, it is clear that unless something is done to dramatically turn around the yields of major crops in Africa, the continent will continue to face a deepening food crisis.

Technologies exist that can end the food crisis in Africa The neglect of agriculture in Africa is all the more surprising when account is taken of some of the high rates of returns on investment in agricultural research. Studies have consistently shown that investment in agricultural research has high social and economic benefits (Alston et al. 2000). The rate of return on agricultural research averages 34 per cent for

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Table 4.2. Rates of return on agricultural research Region

Number of estimates

Median rate of return (%)

Africa Asia Latin America Middle East/North Africa All developing countries All developed countries

188 222 262 11 683 990

34 50 43 36 43 46

Source: Alston et al. 2000, cited in Binswanger and McCalla-Mkhize, 2008.

Africa, compared to 50 per cent in Asia and 46 per cent for all developed countries (See Table 4.2). Africa has had spurts of growth in agricultural productivity (Holmen 2005), but they have not been on a large scale nor sustained as was the case in Asia. Considerable progress is being made in agriculture in Africa and some of its remarkable success stories remain hidden from the rest of the world. Given that Africa has a more diverse set of agro-ecologies and cropping systems than Asia, what will be needed are ‘rainbow green revolutions’ and ‘evergreen revolutions’ (Swaminathan 2006), that combine productivity growth for diverse crops with greater emphasis on the farming systems approach, farmer participation, and local adaptation and management by farmers. Some of the emerging successes in the drive for such ‘rainbow green revolutions’ are briefly discussed below. Maize: Kenya experienced three phases of green revolution for maize. Large-scale farmers rapidly adopted maize hybrids, and this was followed by widespread uptake by smallholders in the high-potential highland zones. The adoption of maize hybrids together with fertilisers then accelerated in the low-potential lowland areas (Hassan and Karanja 1997). The development of maize streak-resistant varieties led to rapid increases in maize yield (Smith et al. 1997). As a result maize, which used to be a subsistence crop, became a cash crop. Gains have also been made in the development of new drought-tolerant maize for southern Africa. The new drought-tolerant and low-nitrogen responsive varieties give a 25 to 30 per cent increase in yields and are now being cultivated on more than one million hectares in southern Africa. Cassava: Researchers at the International Institute of Tropical Agriculture overcame a series of challenges facing cassava production.

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As a means of biological control, a parasitic wasp was introduced from Latin America. Over a decade, the wasp spread rapidly and destroyed the pests, saving hundreds of millions of people from starvation and food insecurity. Plant breeders also developed new varieties with resistance to pests and diseases. The new varieties had 40 per cent higher yields than traditional varieties and because they also had shorter maturation periods they quickly attracted interest among farmers. It was estimated that more than 10 million tonnes of cassava was produced as a result of growing the higher yielding varieties, with benefits accruing to farmers of more than US$ 3 billion in 1988, making cassava ‘Africa’s best kept secret’ (Nweke, Spencer and Lynam 2002). Rice: Africa is witnessing a mini-revolution in rice, which has become one of the most important staple food crops for Africans. Africa’s imports of rice have risen dramatically, increasing from 8.6 million tonnes in 1980 to 126 million tonnes in 2005, at an annual cost of US$ 1.5 billion. Researchers at the West Africa Rice Research Center (WARDA), now Africa Rice Center, achieved a technical breakthrough by successfully crossing the Asian rice (Oryza sativa) with the traditional African rice (Oryza glaberrima). Thus the new rice for Africa (NERICA) was developed. NERICA has several unique advantages: it produces 50 per cent higher yields than existing varieties with no application of fertilisers; produces 200 per cent higher yields with application of fertilisers; has a much shorter maturation period; and has good resistance to weeds, drought, pests and diseases. Between 1980 and 2000 more than 100 new rice varieties were released, with estimated annual incomes from genetic improvement in the order of US$ 375–850 million (Consultative Group for International Agricultural Research (CGIAR) 2006).

Obstacles to achieving a Green Revolution in Africa The crucial question remains: why has the growth in agricultural productivity occurred in spurts without any drive to assure sustained productivity growth? The answer to this question requires a critical assessment of the development paradigms that are influencing agricultural development.

Negative effects of structural adjustment in Africa Initiated in the 1980s by the World Bank and the International Monetary Fund (IMF), structural adjustment was designed to reduce the role of

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government, cut back on public sector expenditures, improve balance of payments, reduce government deficits, enhance macroeconomic performance and help African countries to achieve higher economic growth rates. The key elements of the policy reform include macroeconomic reforms, privatisation of government agencies, liberalisation of markets, removal of governments from the agricultural markets and elimination of subsidies. The effects of these market-led approaches, based on conventional economic theory, continue to be a source of much debate. While some have argued that liberalisation and its associated macroeconomic reforms removed overvalued exchange rates, reduced taxation on agriculture and raised producer prices (Kherallah et al. 2002), it is widely believed that the positive effects were experienced by farmers selling tradable agricultural products. For smallholders selling non-tradable agricultural products, the net effect of the structural adjustment has been largely negative. Lack of access to credit at affordable rates reinforced the liquidity constraints facing smallholders. The result has been a dramatic reduction in the adoption of modern crop varieties and fertilisers. As noted by Nobel Peace Prize laureate Norman Borlaug; ‘The high cost of fertilizers has been especially pernicious’ (Hesser 2006). In several cases, farmers who had earlier adopted modern varieties discontinued the use of modern varieties and chemical fertilisers (Kosura and Karugia 2005). Despite the claim that the use of fertilisers has increased in Kenya (Ariga, Jayne and Nyoro 2006), evidence from across Africa shows that this is not a generalised trend. To the contrary, the World Bank recently accepted that ‘[d]uring the 1990s, fertilizer use per hectare actually declined in about one-half of all African countries … and the average fertilizer use intensity in Africa remains low’ (Morris et al. 2007, p. 22). According to another author writing in Djurfeldt et al. 2005, ‘[the] decline of fertilizer use on food crops appears to be the most dramatic effect of the SAP [structural adjustment programs] and poses a threat to the long-term ability of the sub-continent to feed its growing population’ (p. 97). Poverty and food insecurity have increased since structural adjustment as farmers are unable to afford seeds and fertilisers. The removal of the government from agricultural markets has led to the entry of the private sector, but the markets for staple crops are still poorly organised, remain uncoordinated, have excessive transaction costs and risks, and are subject to price volatility which negatively affects net buyers of food. African smallholders are today abandoned and left to the vagaries of nature and market forces.

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Poorly developed markets and low prices for agricultural products Investment in agricultural technologies is driven by the nature of the available incentives. Output prices play a significant role, as does the ratio between output and input prices. Unfortunately, because of poorly developed markets and high transport costs, output prices have remained low and variable, whereas there has been a more rapid increase in prices for agricultural inputs. Because most of the staple crops are non-tradable, and fertilisers are imported, currency devaluation (which was part of the structural adjustment programmes) increased the price of fertilisers several times above output prices. The value-to-cost ratio for fertiliser use has declined. The removal of the state from agricultural markets has left millions of poor farmers in marginal areas with poor infrastructure at a disadvantage. They are unable to sell their produce at good prices and have to pay high prices for food; this especially affects households that are net buyers of food. The resulting high food prices and price variability have led to rising food insecurity. At the same time, the ability of governments to procure and supply food has been curtailed.

Underinvestment in infrastructure Evidence suggests that investment in rural roads leads to a marked reduction of marketing costs and margins and an increase in farm gate output prices. Investment in roads also increases returns on agricultural research investments (Alix-Garcia 2007). This is especially important in the early phases of a Green Revolution. But lack of infrastructure (roads, railways, ports, electricity and irrigation) continues to hamper the development of African agriculture. High transport costs make it difficult for traders to supply areas not reached by good roads, which are inevitably the poorer areas. Poorly developed infrastructure also limits opportunities for intraregional trade and reduces competitiveness in international markets. Partly due to the reduction in public expenditure, as a result of structural adjustment, many countries are underinvesting in the development of infrastructure. The road density in Africa is several orders of magnitude below that in Asia when it had its Green Revolution (Spencer 1994).

Political will for rural economic transformation Unlike in the case of Asia (especially in India, Malaysia, Pakistan and Bangladesh), African leaders for many years have not shown the political

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will needed to achieve a Green Revolution. In many countries, agriculture was heavily taxed instead of supported (see Chapter 7). Part of the problem is that farmers are powerless. In Asia the powerful rural population exerted political pressure on politicians to support agriculture. In Africa, the cost of political inaction on agriculture is very low, if it exists at all. If farmers were organised into powerful political lobbies, as in the United States, they would be able to influence their governments to commit significant resources to agriculture and develop better institutions and incentives to improve the profitability of agriculture.

Geopolitics of food One of the major factors that encouraged national governments in Asia to support the Green Revolution was the high price of food on the international markets. The rice crisis in the 1970s was a wake-up call. Rising population growth rates, low agricultural productivity, rising costs of food imports and real dangers of social unrest all spurred governments to move towards food self-sufficiency goals. With the Cold War as a backdrop and given concerns about the spread of the Communists across Asia, the US government backed these efforts. This geopolitical situation might have played a role in the shift of the US government policy in Asia from ‘export of technology’ to ‘the need to make [Asian] countries technologically capable of attaining selfsufficiency in food grains’ (Djurfeldt and Jirstrom 2005). Today the geopolitical situation is different in Africa. The US has dramatically decreased its support for agricultural development there. Support for agriculture from the United States Agency for International Development (USAID) declined from a high of 25 per cent official development assistance (ODA) in 1980, to 6 per cent in the 1990s and 1 per cent by 2003. The total US budget for development assistance in agriculture is very low at US$ 169 million or 1 per cent of all ODA, while the USAID budget for agriculture is US$ 27 million.2 This is in sharp contrast to ODA support for agriculture in Asia during the Green Revolution (see also Chapter 11). 2

Calestous, Juma. 2007. Food security, agriculture and economic growth: Opportunities for cooperation between United States and Sub-Saharan Africa Testimony to the House Committee on Foreign Affairs, Subcommittee on Africa and Global Health, United States Congress.

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Declining support for public sector agricultural research In the 1960s–1970s investment in agricultural research increased in many African countries, driving what has been called the ‘emerging Africa green revolution’ (Byerlee and Eicher, 1997). The agricultural research intensity ratio (total agricultural spending divided by the output or agricultural GDP) averaged 0.79 per cent, much lower than the 2.7 per cent for developed economies and the global average of 1.0 per cent (Bintema and Stads 2004). Total public funding for agricultural research has continued to decline since the late 1990s due to the cut in public expenditure more generally, with many programmes dependent on donor funds, which have also been declining. South Africa stands out as the country with the largest funding for public agricultural research, allocating US$ 365.6 million dollars to fund public agricultural research. In all countries and regions, the public sector still accounts for an average of 98 per cent of all agricultural research investments. Challenges facing the national agricultural research systems include poor conditions of service, lack of funds for operations, ineffective agricultural research management and poor science and technology policies. The number of full-time scientists is therefore low, with more than 50 per cent of the countries employing fewer than 100 full-time equivalent researchers. Donor funding has fallen by at least 50 per cent in the past ten years, while national government expenditure for research declined from 0.8 per cent of the agricultural GDP in 1980 to 0.3 per cent in the 1990s. The expenditure per scientist declined by 34 per cent during 1961–1999 leading to the exodus of well-trained staff from national programmes (Haggblade 2005). The recent agreement of the African governments to raise the share of their budgets devoted to agriculture, under the Comprehensive Africa Agricultural Development Program (CAADP), if implemented, will allow governments to significantly increase expenditures for public research.

What kinds of policies are needed to achieve a Green Revolution in Africa?3 The root causes of the low and declining agricultural productivity described above have beleaguered African agriculture for over three decades. The continent is the only region of the world where food 3

The author benefited from discussions with Peter Hazell on this section.

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production per capita has been declining. While the international community is making efforts to address this food crisis, the focus of the response has been largely on meeting emergency and humanitarian food need objectives. This is shifting the focus of the agenda away from addressing the structural issues that underlie the low productivity of African agriculture. Hence, it is time to shift the agenda towards a Green Revolution that will assist African countries to rapidly raise agricultural productivity and lift millions out of poverty. The Alliance for a Green Revolution in Africa (AGRA) was established by the Rockefeller Foundation and the Bill and Melinda Gates Foundation to assist African countries in achieving a uniquely African Green Revolution. In order to achieve this goal, there is an urgent need to focus on the following policy areas:

Invest in raising agricultural productivity of staple food crops and expand value addition Staple food crops are grown by millions of poor smallholders, so productivity growth will have considerable impacts on rural incomes. Income multiplier effects will also be high since the rural poor spend their incomes on local food and service sectors. Because traditional cash crops are cultivated by a small number of farmers, and are not consumed as food, the impacts of raising their productivity are much reduced in terms of rural employment, incomes and consumption multiplier effects. A recent analysis by the International Food Policy Research Institute (Diao et al. 2008) shows that raising the productivity of staple food crops can help to lift 100 million persons out of poverty in sub-Saharan Africa. An analysis of the potentials for growth in East and Central Africa shows that GDP growth rates are highest for investments in food staples (Table 4.3). A growth of 1 per cent in the staple crop sector is estimated to generate US$ 1.7 billion a year in growth of GDP, compared to US$ 1 billion for livestock and US$ 600 million for vegetables and fruits, US$ 100 million for traditional exports of coffee and US$ 75 million for pulses. Furthermore, given low income elasticity of demand, it is critical to transform these staples from being non-tradable to tradable and to expand their markets beyond national borders. Value-added processing is necessary to reduce the bulkiness of staple crops. However, investment in staple crop processing is very low. While the size of the staple crop market in Africa has been estimated to be around US$ 150 billion per year, most of this is lost due to lack of processing and value addition.

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Table 4.3. Cumulative gross domestic product (GDP) gains to 2015 from 1 per cent additional growth in selected commodity group subsectors (US$ million) in Eastern and Central Africa Commodity

Cumulative GDP gain

Staples Livestock Vegetables and fruits Hot beverages Pulses

1700 1100 600 100 75

Source: adapted from Figure 5.3 in Omamo et al. 2006.

Table 4.4. Value, destination and composition of agricultural trade, 1996–2000, East and Southern Africa Traded items and destination Traditional exports to non-ECA countries Non-traditional exports to non-ECA countries Other exports to non-ECA countries Cross-border trade with the ECA Domestic market for food staples TOTAL

Value ($ billions)

Share (%)

2.4 1.3 0.3 0.3 15.9 20.2

11.9 6.4 1.5 1.5 78.7 100

Source: Omamo et al. 2006. ECA, Eastern Europe and Central Asia.

Hence, value-added processing would not only raise incomes for farmers; it would also stabilise prices for staple crops, reduce losses, and stimulate multiplier effects in local economies (e.g., from sales of locally produced processing equipment and emergence of local food-processing centres). This would help to expand intra-regional cross-border trade – which, for example, only accounts for less than 2 per cent of the total value of trade in East and Southern Africa, due to high transport costs (Table 4.4). Policies are needed to create incentives for value-added processing, including fiscal incentives that lower taxes on the importation of processing equipment, and tax incentives for firms that invest in forward linkages in food processing in local economies. Public policies can also

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be used to support territorial models for development of staple crops, where governments designate zones as processing and value-addition zones for staple crops, and where complementary fiscal and infrastructural policies, coupled with low-cost financing, can be used to stimulate value-added processing for local, regional and international markets.

Avoid competition for land between biofuel and food production One of the key areas contributing to the high food prices is the conversion of food into ethanol and biodiesel. It has been estimated by the International Food Policy Research Institute that about 75 per cent of the increase in food prices can be attributed to the rapid expansion of biofuel production. Both the US and the EU also use subsidies to encourage farmers to produce crops for fuels, including tax credits, consumption mandates, subsidies to promote investments and support for research (see Chapters 5, 6 and 9). The high demand for biofuel is already competing with food production in Africa. A number of large multinationals and sovereign wealth funds are on a ‘green gold’ rush for land in Africa.4 Horand Knaup noted that many African countries are giving away large tracts of land for cultivation of crops for the production of ethanol and biodiesel. The Tanzanian government is said to have given away thousands of hectares of land to firms. In Ghana, a Norwegian firm has secured 38,000 hectares of land for biofuel production. It was noted that foreign firms could potentially bid for 11 million hectares of land for the production of biofuel in Mozambique. In Madagascar the government leased out 1.3 million hectares of land – accounting for 50 per cent of all its arable land – to the Daewoo conglomerate from South Korea for the production and export of maize to South Korea. While some of these land areas are not used for food production, it is evident that increased conversion of arable land for production of biofuel will eventually lead to displacement of the rural labour force, migration and competition with food production.

Develop rural input markets Before the structural adjustment, farmers were supplied inputs by public sector marketing agencies set up to assure access for farmers to farm inputs. Many of these institutions were inefficient, corrupt and subject to high 4

See article in www.spiegel.de/international.

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management costs in reaching farmers. The agricultural input credits that they provided went unpaid and the agricultural development banks that they set up ended up having low repayment rates. While the private sector has entered into many of the input markets, several challenges remain. Many farmers still have to travel several kilometres to find farm inputs. High search costs increase the cost of adopting improved seeds, fertilisers and other technologies. In places like Malawi, the average distance travelled by farmers in search of farm inputs can be as far as 100 kilometres. There is a scarcity of rural entrepreneurs selling seeds and fertilisers. There is a need for a new institutional revolution in Africa. In this context, the Rockefeller Foundation, for example, initiated a programme to train the people running small rural shops supplying primary consumables, to turn them into suppliers of agricultural inputs. The programme initiated training, which, when completed, provides the rural shopowners with specialised product knowledge and business management skills. The trained and certified shopowners become certified agrodealers, with a certificate of accreditation displayed in their shops. Without access to capital, these agrodealers will not be able to provide inputs at the right time, in the quantity and quality or at prices affordable to farmers. Hence the Rockefeller Foundation developed a ‘Credit Guarantee Financing Facility’ to help mitigate the risks faced because of missing capital and insurance markets, to lower the risks faced by the agri-input supply companies and to accelerate the flow of agricultural inputs into rural areas. The agrodealer model has now shown remarkable success in many countries, especially in Malawi, Kenya, Tanzania, Uganda, Nigeria and Mali. The credit guarantee facility has also been remarkably successful in terms of leveraging the agri-input supply companies to move into rural areas. There are several other advantages to the agrodealer model in reaching the rural poor. Today, governments can simply provide ‘smart subsidies’ through the agrodealers; farmers get input vouchers which they take to the agrodealers to redeem. It is smart: it assures that the intended beneficiary gets the subsidised inputs, but the subsidy also helps to build demand to sustain the private sector in rural input markets. The challenge is how to scale this approach up to reach hundreds of millions of farmers with affordable farm inputs. This will clearly require innovative public–private sector partnerships. The other initiative is the use of mobile phone-based encrypted ‘input credits’ that can be sent from commercial banks to farmers. This allows farmers to open savings accounts at rural banks and receive their

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government ‘input credits’ via their mobile phones. The detailed information on the beneficiaries is automatically relayed to the network of agrodealers, who – using a pre-approved personal identification number – will be able to access and honour the ‘input credits’ at their shops. To reach national scale, governments can consider the establishment of ‘national agricultural input credit guarantee facilities’. These facilities will help reduce the risks faced by the private sector in supplying agricultural inputs on this scale to rural areas.

Adopt bold public policies to support poor farmers Plant breeding played a major role in the agricultural technical change that occurred in Asia, but what is often forgotten is that the policy environment and support systems created the incentives that allowed farmers to adopt the high-yielding seed, fertiliser and irrigation technologies. Governments led the way through massive support for irrigation, extension, research and development, price support, transport, storage and marketing, especially to reduce prices for net buyers in disadvantaged zones. The model was a ‘state-driven and market-mediated process with sharp focus on smallholders’ (Djurfeldt et al. 2005). The shift from public-sector-driven extension systems to private systems has meant that smallholders are excluded since they are unable to pay for extension costs. As a result, extension services focus on the needs of farmers growing cash crops. In Uganda, the privatised extension system (the National Agricultural Advisory Services Project (NAADS)), introduced by the World Bank, has been criticised as biased against small farmers and staple food crops. Market-based systems and the lack of subsidies for small farmers also mean that poor farmers will not be able to afford agricultural inputs whose prices continue to rise due to poorly developed market infrastructure. But the reality is that millions of farmers are in poverty traps. Market forces alone will not lift them out of poverty. Strong government interventions are needed to allow millions of farmers to have affordable farm inputs. African countries are now developing their own ‘home-grown’ approaches to confront the deepening food crisis. In this context, Malawi, which is now experiencing a green revolution for maize, is a good example. The country faced a major food crisis just a few years ago due to a drought that left millions of people starving, especially children. The government embarked on a bold policy of subsidy for fertilisers and improved seeds to improve access and

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affordability for farmers. Many donors disagreed with the government’s subsidy programme, including the World Bank and USAID. But the results have been remarkable, leading to a major rethinking of ‘anti-poor subsidies’ in the development community. However, since the subsidy programme was largely implemented through government agencies, it led to some displacement of the private sector. The government learned from this and when it launched its US$ 60 million subsidy in 2006–2007, it included the private sector in the distribution of seeds and fertilisers. Local seed companies supplied all the seeds. The government and private sector imported fertilisers. The government used vouchers (redeemable from the private sector agrodealers) to reach the targeted farmers. The results were positive – as the country generated an additional maize surplus of 1 million tonnes. It sold US$ 160 million worth of maize, generating scarce foreign exchange by selling some of its surplus maize to Zimbabwe. Malawi also became a donor country by giving food aid of 10,000 tonnes to Lesotho and Swaziland. While there is some contention about the actual surplus production, a recent evaluation of the programme (Chirwa, Kydd and Doward 2006) put the figure at around 700,000–900,000 million tonnes national surplus production – which is in itself a success for a country that had always suffered food insecurity. This type of remarkable growth in food production will need to be supported and continued. If Malawi can succeed with smart subsidies (better called ‘growth enhancement credits’) a sustainable Green Revolution is possible in all African countries with similar and consistently implemented pro-poor policies.

Provide equitable access to land and security of land tenure for farmers Land tenure security is necessary to allow farmers to invest in new technologies. This is especially important for investment in land and water management technologies, which are capital intensive. Without secure land tenure farmers may not embark on long-term investments for which benefits accrue in the future. Without codified land title it is more difficult for farmers to secure credit from banks. However, concentration of land ownership poses potential difficulties for the Green Revolution and it can skew income benefits from adoption of new green revolution technologies with larger farms likely to benefit more than small ones. The inequity is especially pronounced for women who are marginalised by customary tenure and statutory land policies.

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Inequitable distribution of land, especially in Southern African countries, where there has been historical injustice in land distribution, means that measures will be needed to ensure equitable access to land, especially for smallholders. While models of willing buyer and willing seller have been used, land transfer is often too slow, leading to state appropriation (as for example in Zimbabwe). For example, in South Africa only 3 per cent of the land has been redistributed to black farmers since 1993. There is a need to promote land policies and reforms to secure land rights; provide women with inalienable rights to land; reduce inequities in land ownership patterns; promote better functioning land markets; and secure the land rights for acquired immunodeficiency syndrome (AIDS) orphans who are heads of households, to allow them to invest in new agricultural technologies.

Invest in the next generation of farmers Africa’s farming population is ageing rapidly. Most farmers are in their late sixties and some are in their eighties, in particular the grandmothers who now have to take care of AIDS orphans. The high rate of migration from rural to urban areas has contributed to this problem, as the young and agile population members migrate in search of better lives in the cities. In addition, the majority of the farming population are not literate. Rural literacy rates are several times lower than urban ones. In the past, the ageing population was not so much of a problem, as high fertility rates assured a supply of labour to work the farms. Out-migration, loss of lives to AIDS and rising morbidity have led to both a reduced labour supply and lower productivity of labour. The absence of mechanisation means that farmers continue to rely on traditional hand tools. This lowers labour productivity. Furthermore, agriculture today is a knowledge-intensive and marketdriven sector. This is combined with the emergence of new trade rules, safety standards and technical issues that determine what to produce, how to produce, where to sell, when to sell and how to sell. A new cadre of farmers has to emerge in Africa for the future: new ranks of skilled and younger farmers who are able to make farms into profitable businesses. But this will require careful planning, national reorientation to position agriculture as a key engine of growth, and financing and secure land tenure to support the younger and well-educated generation to move into agriculture. Exposing the youth to farming as a business is the key to securing their interest in it as a commercial venture. New government

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programmes are needed to promote a transformation of agriculture into commercial and profitable ventures for the younger generation if African agriculture is to become modernised and competitive.

Finance global public goods in agriculture Fifty years after the Green Revolution occurred in Asia, the Consultative Group on International Agricultural Research (CGIAR) has not been able to achieve a green revolution for Africa. There are too many centres working in Africa, each with its own mandate and mission, and a lack of coordination. The core funding for the CGIAR has declined over time and the centres now compete for resources. The World Bank provides core support of US$ 50 million to the system. But that support is from an unrestricted fund within the Bank which can be re-allocated into other areas of social development. Several reviews have looked at how to improve the efficiency and effectiveness of the CGIAR, but many of the recommendations go largely unimplemented. There is no doubt that Africa needs a well-functioning CGIAR – one that is accountable for addressing its agricultural productivity challenges. A new financial architecture is needed for a reformed CGIAR. The CGIAR system requires major restructuring in many areas. The number of centres has to be significantly reduced. The system in Africa could be reduced to no more than three centres, each designated for a major zone: East Africa, Southern Africa, and West and Central Africa. Some have even argued for only one CGIAR centre in Africa – with a clear mandate. The reconfigured CGIAR-Africa centre(s) would need to be tasked with working with national agricultural research centres and developing a new vision for how the system can help in the drive for the Green Revolution, reduce the transaction costs of working with the CGIAR and reduce the overhead costs compared to those of several dispersed and loosely coordinated centres. The newly reconfigured CGIAR centre(s) for Africa should then be fully funded to carry out its (their) work, with a clear mission of helping Africa achieve a Green Revolution and to manage its natural resource base.

Concentrate investments in Africa’s breadbasket areas The current way in which development financing is done in Africa is not designed to achieve a green revolution. The Asian Green Revolution focused on homogeneous agro-ecological environments – basically

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irrigated rice- and wheat-growing areas. Africa is more diverse with different agro-ecological zones, dominated by rain-fed agriculture. Africa needs ‘multiple Green Revolutions’ as no one size will fit all. The requirements for a green revolution in the semi-arid areas are very different from those in the humid and sub-humid zones – in terms of improved seeds, soil and water management technologies, markets, policies, institutions and infrastructure. Because development financing for agriculture, whether bilateral or multilateral, is often based on projects, and not agro-ecological zones, there is nothing that assures that the type, concentration and scale of investments necessary for a green revolution will occur. Achievement of a green revolution in highly diverse African agricultural settings is therefore being left to chance. What is needed is ‘agroecological-zone-based financing’ that will ensure well-targeted financing to trigger the green revolution in well-defined ‘National Crop Intensification Zones’ – areas where significant growth in productivity can be achieved – and to prioritise policy, infrastructure and financial investments in those zones. Reshaping the deployment of financing for agriculture towards National Crop Intensification Zones has several advantages. Countries will focus on their own ‘bread baskets’ where they can intensify agricultural production for national food supplies. The increased production will lead to lower food prices. Lower food prices will help to raise real wages, reduce food imports and conserve scarce foreign exchange. It is not that Africa cannot feed itself; the problem is that it has not concentrated on taking advantage of its robust ‘breadbasket zones’.

Develop and scale up innovative financing to leverage commercial banks to support agriculture The absence of financial markets undermines the efforts of the private sector in developing value chains that support competitive agriculture. Farmers are also unable to secure access to loans. Yet the existing commercial sources of finance require very stringent collateral, besides charging extremely high interest rates. Banks justify these requirements on the basis of high risks and the transaction costs of executing and monitoring numerous small and scattered loan portfolios. While private equity funds do exist, they focus on equity investments in medium and large agribusinesses. Despite the success of the microfinance institutions, they do not lend much to agriculture. The public sector can help to reduce the risk of

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lending to the agricultural sector in many ways. The provision of public information on weather patterns will help banks and insurance companies to assess risks properly and develop appropriate insurance products. The cost of lending is much lower for larger groups of farmers. But the organisational costs of establishing well-functioning financial cooperatives need to be internalised for them to develop properly. Governments can provide subsidies to bear the initial costs of organising farmers into groups that can attract loans from banks. Governments should also encourage the use of risk-sharing arrangements to reduce the risk of lending to the agricultural sector. Given the grim picture of the global financial markets, there is a need for innovative approaches to reduce such risks. The Alliance for a Green Revolution in Africa (AGRA) is spearheading such innovative approaches. Using loan guarantees, AGRA and the International Fund for Agricultural Development were able to successfully leverage US$ 50 million of financing for agricultural value chains in Kenya, with the Equity Bank of Kenya. AGRA and the Financial Sector Deeping Trust also used loan guarantees to leverage US$ 5 million in new financing for farmers in Tanzania. AGRA is currently working with the Standard Bank of South Africa to leverage US$ 200 million in new financing for agricultural value chains in four countries (Ghana, Uganda, Mozambique and Tanzania). These successful efforts offer a number of lessons. First, it is possible to meet a huge part of the resources needed for the Millennium Development Goals (MDGs) through the use of innovative financing partnerships with local banks in Africa. Using loan guarantees, it is possible to leverage up to ten times the value of the guarantee deposit in the banks. For example, assume that there is a US$ 400 million loan guarantee facility. This can leverage up to US$ 4 billion in financing for the agricultural value chain by commercial banks. That is 50 per cent of the total amount needed annually to achieve the MDG goal for meeting hunger and poverty in Africa through accelerated agricultural growth. Second, loan guarantees allow banks to lower their interest rates to farmers. Prohibitively high interest rates prevent farmers from investing in new agricultural technologies. In all cases where AGRA has used the loan guarantee risk-sharing arrangement, the banks have been able to lower their lending rates significantly. Third, using loan guarantees also gives incentives for banks to reduce their demands for collateral. In Kenya, banks often ask for collateral that is in excess of 130 per cent of the value of the loan. In Zambia, banks ask for collateral in excess of 200 per cent of the value of the loan.

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Fourth, there is a huge difference between the real risk and the perceived risks of lending by commercial banks. In most cases the perceived risks of lending are much greater than the real risks. Loan guarantees reduce these perceived risks.

Expand agricultural development assistance to Africa While African governments are showing renewed political will to improve opportunities for agriculture by increasing the share of the national budgets allocated to the sector, their efforts alone will not be enough. International donor support and increased development assistance will be needed to complement national resources. The US government, which has traditionally been a major donor for agricultural development assistance, has shifted its focus from agriculture and Africa. This trend needs to be reversed. The US played the lead role in the Asian Green Revolution. Indeed, the term ‘Green Revolution’ was coined by former USAID Director William Gaud, who said of the rapid spread of the high yielding varieties in Asia: ‘These and other developments in the field of agriculture contain the makings of a new revolution … I call it the Green Revolution’ (Brown, 1970). By increasing overseas development assistance to agriculture, the US and other G8 countries will be investing in peace on the continent, and in securing that peace and strengthening its fledgling democracies through rapid growth in agricultural productivity and infrastructure investments. They will be following up on their new focus on new financing for achieving the Millennium Development Goals expressed during the 2002 International Conference on Financing for Development. According to the Food and Agriculture Organization of the United Nations (FAO), ODA increased from US$ 58.3 billion and US$ 69 billion in 2002 and 2003, respectively, to US$ 79.4 billion and US$ 106.8 billion in 2004 and 2005 (FAO, 2007). Much still needs to be done by the G8 countries to fulfil the pledge to devote 0.7 per cent of their gross national incomes to official development assistance for developing countries. Unfortunately, there are many promises with little action.

Establish a ‘Global Fund for a Green Revolution in Africa’ Current lending in agriculture from the multilateral development banks focuses on loans instead of grants. The best way to help Africa rapidly scale up the successes in its agriculture is through large-scale grants.

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However, it is very difficult for countries to secure financing to help them to scale up their successful green revolution efforts, including complementary investment in infrastructure, such as much-needed irrigation and water management infrastructure. Estimates from IFPRI show that Africa will need to spend US$ 38 billion over the next five years to achieve rapid agricultural growth that can lift 100 million people out of poverty. African ministers of agriculture and finance who gathered at the Oslo Green Revolution conference in 2007 recommended the establishment of a facility to finance the Green Revolution: a Global Fund for the Africa Green Revolution. They repeated the call at the 2008 conference. Their call can be easily understood if one looks at the efforts being made in Asia to address the food crisis. China spent US$ 5.6 billion in 2007 on a comprehensive programme for subsidising farmers to produce more food. The Philippines has just launched a US$ 1 billion subsidy programme for rice farmers. It is clear that Asian countries understand the critical need to focus on bold policies that will spur agricultural growth and assure food security. But African farmers are not being supported with comprehensive packages of incentives, including subsidies and investments in research, extension and infrastructure. With the massive support being provided for Asian farmers, Africa faces the risk of being left behind – yet again. Asia now stands a better chance of achieving its second Green Revolution than Africa does of achieving its first Green Revolution. There is an urgent need to seriously engage in answering the question of how to accelerate financing for countries for the Green Revolution in Africa. The proposed fund to support the scaling up of the Green Revolution in Africa is feasible and should be given high priority. The current financing in response to the food crisis has focused too much on emergency funds. What Africa needs now is large-scale financing to support the agricultural growth agenda and to allow millions of its farmers to access improved seeds, fertilisers and micro-irrigation, which would rapidly raise their agricultural productivity.

Develop crop insurance to reduce impacts of climate change on African agriculture There is now a consensus that climate change is perhaps the greatest challenge facing the earth. The Stern Review on the Economics of Climate Change noted that ‘the impacts of climate change are not evenly distributed – the poorest countries and people will suffer the most. And if and when the damages appear it will be too late to reverse the process.’

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Climate change is expected to dramatically change the face of agriculture and increase the vulnerability of hundreds of millions of poor farmers, and rural and urban populations in Africa. The Intergovernmental Panel on Global Climate Change and the United Nations Convention projects that 75–250 million people in the Sahel, which is expected to become drier, will be at risk of droughts that will be more severe than those that affected the region in the 1970s (see also Chapter 6). Flooding in southern Africa is expected to increase, bringing to mind the severe floods of 2000 that wiped out one-third of the crops in Mozambique, killed many and led to massive displacement of populations (Fleshman 2007). According to model estimates, the net costs of the effects of climate change in Africa could be as high as US$ 133 billion with agriculture bearing the brunt – an estimated loss of US$ 132 billion (Morrison, Schesinger, and Andronova 1997). While Africa contributes less than 3 per cent of the global emissions of greenhouse gases, compared to 40 per cent from the G8 countries, it must now bear a disproportionate burden of economic losses, as well as the human, health and social consequences of the effects of the emissions. Others pollute and Africa pays the price. Several measures are needed to assist Africa, especially its vulnerable farmers, to adapt to the impacts of climate change. Africa will need more drought- and flood-tolerant crops for its farmers. This will require greater support for national and international agricultural research centres to develop the new strains of crops with tolerance to drought, floods, diseases and pests. Significant investments will be needed in irrigation and water management across Africa. Policies are also needed to encourage the development of crop insurance (especially weather-indexed crop insurance) to reduce the risks faced by farmers from investing in technologies and to protect their assets in case of production, climatic or price shocks or health risks. Because many farmers may be unable to pay the full costs of securing crop insurance, subsidies may be needed to cover part of their costs or to reduce the fixed costs of developing a market for crop insurance. Hence climate change needs to be fully integrated into national agricultural sector planning strategies in Africa.

Conclusions This chapter has reviewed the root causes of the low and declining agricultural productivity that has beleaguered African agriculture for

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over three decades. The continent is the only region of the world where food production per capita has been declining. The situation is made worse by the current food crisis, which has plunged an additional 100 million persons into poverty. While the international community is making efforts to address this crisis, the focus of the response has been largely on meeting emergency and humanitarian food need objectives. This is shifting the focus of the agenda away from addressing the structural issues that underlie the low productivity of African agriculture. This chapter has argued that it is time to shift the agenda towards a Green Revolution that will assist African countries to rapidly raise agricultural productivity and lift millions out of poverty. To achieve this goal there is an urgent need to expand investments in agricultural research and extension, especially at the national levels. Larger investments are also needed for a reform and re-focusing of the international agricultural research system of the CGIAR. These efforts need to be supported on a large scale to allow African countries to achieve the Green Revolution and meet their Millennium Development Goal target on hunger. Achieving this will require going beyond ‘business as usual’. There will be a need for bold pro-poor policies to improve the access of farmers to improved seeds, fertilisers and irrigation. New innovative approaches to financing will be needed to leverage the large financial liquidity that is in local financial institutions in support of the green revolution. New models such as agrodealers that supply farm inputs in rural areas need to be scaled up across all of rural Africa to reduce the distances farmers have to travel to find seeds, fertilisers and other farm inputs. Significant investments will be needed in the area of agro-processing to add value and reduce farm losses. New risk management instruments will be needed to mitigate the impacts of climate change on smallholders. Efforts will be needed to increase intra-regional trade and to lower tariff and non-tariff barriers between African countries in order to expand markets for staple food crops. Significant investments will be needed in infrastructure, especially rural roads, irrigation and electricity to support the process of agricultural intensification. Because the costs of these investments are high, it is critical that these be focused in the breadbasket areas where the opportunities for substantially raising agricultural production are high. All these activities will cost a lot of money for African countries. Despite the renewed commitments of the countries to agriculture, their resources pale into insignificance compared to what is needed to achieve

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the Green Revolution. There is an urgent need to create a global fund in support of the Green Revolution for African agriculture, although there is as yet no consensus on how it should operate and where it should be located. It is critical that these discussions progress quickly to allow African countries the means to access the new financing needed to scale up Green Revolution technologies. Africa can turn its agriculture around and become a breadbasket for the rest of the world. Achieving the Green Revolution in Africa will require significant levels of financial support to African agriculture. This is the time to make those investments and create new hope and opportunities for millions of small-scale farmers in Africa.

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5 Rising food prices: causes, consequences and policy responses wayne jones and armelle elasri*

When written in Chinese, the word ‘crisis’ is composed of two characters – one represents danger, and the other represents opportunity.

The recent sharp rise in prices of many agricultural commodities has led to worldwide concerns about food affordability for the poor, and about future food security. This paper examines the main factors behind the recent price hikes and presents the medium-term market projections of the Organisation for Economic Co-operation and Development – Food and Agriculture Organization of the United Nations (OECD–FAO) (OECD–FAO 2008). It then looks at some of the consequences of higher food prices on food security, particularly in developing countries, and examines recent policy for OECD and developing countries. Finally, the interests of developing countries in trade liberalisation as a means to ensure food security are reviewed and again some policy recommendations are provided.

What are the causes? After decades of bemoaning low commodity prices and poor returns on farming, policymakers are now worried about record high food prices and their impacts on poverty and hunger. The situation is often described as a crisis. There have been violent street demonstrations in many developing countries and the UN set up a High Level Task Force in * Wayne Jones, Head of the Agro-food Trade and Markets Division, Trade and Agriculture Directorate, OECD, Paris, France. Armelle Elasri, Principal Research Assistant, Trade and Agriculture Directorate, OECD, Paris, France. The views expressed in this chapter are those of the authors and do not necessarily represent the views of the OECD or its member countries.

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Figure 5.1. Wheat, coarse grains, rice, oilseeds – real and nominal prices 1970–2017 Source: OECD–FAO Agricultural Outlook database 2008.

April 2008 to look at ‘how the [UN] system could best contribute to combating the global food crisis’. World prices of wheat, coarse grains (in particular corn), rice and oilseed nearly doubled during 2005–2007, and continued to rise in early 2008. Among the major cereals, the increases in wheat prices were most pronounced. In 2007, international wheat prices averaged close to 60 per cent above the level in 2006. While these prices represent record levels in nominal terms, they remain well below historical highs in real terms (Figure 5.1). Some of the reasons for higher prices are cyclical while others are more structural in nature.

Key cyclical factors The dramatic increase in prices since 2005–2006 is partly the result of cyclical adverse weather conditions in the major grain-producing regions

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50% 45% 40% 35% 30% 25% 20% 15% 10% 5%

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Figure 5.2. Deviation from trend in wheat and coarse grain yields. Source: United States Department of Agriculture, production supply and distribution database.

of the world, which had impacts on trade and stock levels. Between the 2005 and 2007 marketing years, world planted area of wheat and coarse grains remained quite stable, but weather shocks in this period affected yields (Figure 5.2). For example, in 2006, wheat production in the European Union, Australia and the US decreased by nearly 14 per cent, about 32 million tonnes (MT). During the period 2005–2007, yields of two major exporting countries, Australia and Canada, fell by about onefifth in aggregate. In a context of low global stocks, these developments alone would have triggered strong price reactions. These conditions have occurred many times in the past; prices have come down following a return to more normal conditions, and supply has responded over time. This should be a temporary condition, barring underlying climate change or water constraints that lead to permanent reductions in yield. Upward pressure on international prices was also generated by EU feed shortages which resulted in a robust import demand; not only for maize but also sorghum and other major coarse grains. Wheat is a leading feed grain in the EU. Following the shortfall in wheat production in 2006, and limited export availability from the Black Sea, wheat prices in the EU continued to increase, a factor which encouraged imports of alternative feeds, especially maize and sorghum. In fact, the surge in imports by the

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Euro/USD 1.2 1.1 1 0.9 0.8 0.7 0.6 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Figure 5.3. US$/Euro exchange rate: historical and projected Source: OECD–FAO Agricultural Outlook database, May 2008.

EU was the single most important factor in the expansion of world trade in coarse grains in 2007 to record levels. Prices of barley, another important cereal, also soared in 2007. Supply problems in Australia and Ukraine, compounded with strong demand for imports, contributed to a doubling of prices of both feed and malting barley. Macroeconomic conditions have also favoured a somewhat ‘artificial’ rise in world prices. The weak US dollar typically leads to higher US$denominated prices of traded goods. In 2007–2008, the slide in the US dollar against many currencies, the euro in particular, made wheat imports from the US cheaper. This was reflected in the surge of wheat imports from the US which helped to push US wheat prices higher. In February 2008, for example, the export price of US No.2 Hard Red Winter averaged US$ 450, some 115 per cent higher than a year earlier. The US dollar is expected to strengthen against most currencies over the medium term (Figure 5.3). A stronger US dollar raises prices in domestic currency terms in exporting countries providing a supply response, while reducing demand in importing countries. The combination of increased supply and reduced demand would normally put downward pressure on world prices.

Key structural factors A combination of more structural factors has also contributed to the large price rises, on the supply side as well as on the demand side. One

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Figure 5.4. Global stock to use ratio, maize, wheat and vegetable oil Source: OECD–FAO Agricultural Outlook 2008–2017.

key factor was the low stocks of wheat, coarse grains and vegetable oil relative to use, reducing the buffer against shocks in supply and demand. For wheat and coarse grains, production grew by 46 million tonnes (3 per cent) between 2005 and 2007, while total use increased by nearly double that amount, i.e. 80 million tonnes (5 per cent), over the same period. For vegetable oils, the gap between production and growth in use was also about two percentage points. Had stocks been more readily available, they might have helped to bridge these gaps. During the next ten years, stocks are projected to remain low, implying that markets will remain tight (Figure 5.4). This should not lead to permanently higher prices, but certainly provides the background for more price volatility in the future. The rising oil and energy prices are important contributing factors to the recent increase in prices of agricultural commodities. Higher energy prices affect the costs of commodity production and the costs of transportation, processing, distribution and marketing, and contribute to higher average prices. The OECD–FAO 2008 reflects the widely held belief that higher oil prices are a permanent feature and that further gradual increases are likely. It projects that oil prices will rise gradually over the medium term (Figure 5.5). On the demand side, changing diets, urbanisation, economic growth and expanding populations are increasing food and feed demand in

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Table 5.1. Supply balance, wheat and coarse grains, oilseeds, 2005–2007 Change from 2005 to 2007 Wheat/coarse grains

World production World use Of which biofuels

Vegetable oils

Million tonnes

%

Million tonnes

%

46 80 47

3 5 103

7 9 5

7 9 114

Source: OECD–FAO Agricultural Outlook database 2008.

USD/barrel 120 100 80 60 40 20 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Figure 5.5. Outlook oil price forecast Source: OECD–FAO Agricultural Outlook database 2008.

developing countries, but these conditions have existed for some time and do not account for the sudden price increases. Globally, and in absolute terms, food and feed remain the largest components of demand in agriculture but in recent years the fast-growing demand for biofuels feedstock was the largest source of demand growth and hence a strong factor underpinning the upward shift in prices of agricultural commodities. The available data suggest that somewhat more than half of the increase in the demand for grains and vegetable oils between 2005 and 2007 was due to biofuels (Table 5.1). The OECD–FAO 2008 assumes continuation of policies that support the production and use of biofuels with no dramatic change in technology. While the use of grains and vegetable oils for biofuels

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is anticipated to represent a falling share of the overall increase in demand for these commodities, it is nevertheless a new and probably permanent factor exerting upward pressure on prices.

What are the medium-term prospects? The OECD–FAO Agricultural Outlook is an annual report, released in May/June of each year, providing a ten-year market projection for major commodities, based on a set of assumptions. For example, weather conditions and productivity trends are assumed to be normal. Thus, the outlook is an indication of medium-term trends rather than forecasts for any particular point in time. National experts from around the world provide production, price and trade projections, which are then fed through an OECD–FAO partial equilibrium model to produce global estimates and ensure market consistency. Current agricultural policies are also built into the model. This approach allows considerable scope for scenario analysis by changing one or more of the underlying assumptions. Since the 2008 Outlook was prepared, there have been dramatic market developments. Many agricultural commodity prices have dropped by more than 50 per cent from their peaks due to good harvest, global slowdown and lower demand. Oil prices have also declined by twothirds in response to the financial crisis, lowering production costs and reducing demand for biofuels. The full impacts of the financial crisis are still uncertain but most analysts are predicting severe economic slowdown or recession in many countries. With these developments, starting points and medium-term prospects will be markedly different, such that the price projections in the 2009 agricultural outlook will most likely be lower than those currently projected. However, the fundamentals suggest that average real prices for the next decade will remain above those for the last ten years. The world population will continue to increase. Emerging economies will continue to grow, albeit at a slower pace. Household incomes will rise and consumers will still seek higher protein diets. The production of biofuels from agricultural feedstocks will increase if support policies remain in place, while climate change and water shortages will increasingly hinder supply response. Moreover, growing energy demands will keep an upward pressure on oil prices in the medium term. In any event, the issues of global food security – food affordability and availability – will increasingly challenge producers and governments alike.

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At the time of writing, the outlook for crop production in 2008 was generally positive. The forecast for global cereal production made by the International Grains Council (IGC) in July 2008 suggested an increase of nearly 2 per cent from 2007, with the bulk of the growth in wheat output (+9 per cent) due to a substantial recovery in production in major exporting countries of the EU, the US, the Commonwealth of Independent States (CIS) and Australia (IGC 2008). Larger rice crops have been harvested in the southern hemisphere and the main paddy crops have reached a critical stage of development in the northern hemisphere. Barring any major setback in the coming months, global paddy rice production in 2008 is forecast to increase by 1.5 per cent to 668 million tonnes, with much of the expansion occurring in Asian countries. World maize production is forecast at 759 million tonnes, down 3 per cent on the previous year’s record, as a slightly smaller US crop offsets gains elsewhere. The increased cereal supply should bring some relief to the market in 2008, but with use forecast to increase further, total cereal stocks are expected to be little changed (+0.5 per cent) from the lower levels of the previous two years. As a consequence, the overall market situation is likely to remain tight throughout the year. There has been a downward trend in the prices for some of the major commodities since mid 2008 (Figure 5.6). Despite some positive developments, high food prices in late 2008 were still causing an emergency situation affecting the poorest and most vulnerable groups, with the UN High Level Task Force on Food Security calling for urgent and continuing action. Good harvest prospects for a number of major crops, mainly in developed countries, and lower fuel costs were reducing global prices. Prices of wheat, maize and rice, for example, fell from mid-year peaks. The price of wheat in September 2008 was 7 per cent lower than it had been a year earlier. The price of maize was also significantly lower in September 2008, but was still 44 per cent higher than it had been a year before. The price of rice was 19 per cent below its May peak but still 128 per cent higher than a year earlier. In August 2008, the FAO price index for staple crops had fallen sharply since June, but was still 13 per cent higher than in August 2007, and 60 per cent higher than in August 2006. But these lower world prices are not always transmitted to local markets. Price transmission can be hampered by border measures, domestic policies, weak infrastructure and high marketing margins. Prices of staples remained exceptionally high at the local level in some cases, particularly in low-income food-deficit countries. For example, in

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Figure 5.6. Weekly wheat, maize, rice and oilseeds prices for 2008 Source: FAO, International monthly prices database, September 2008.

August 2008 the price of millet was still rising in much of Africa, even though it had been falling on the global market. In Ethiopia, prices of local staples in August 2008 were still 300–500 per cent higher than in the previous year. The medium-term projections presented here come from the OECD– FAO Agricultural Outlook report released in mid 2008. The projections and assessments provided in the report are the result of close cooperation between the Secretariats of the OECD and the FAO and national experts in member and some non-member countries, and thus reflect the combined knowledge and expertise of this wide group of participants. The report draws on commodity, policy and country expertise in providing a longer-term assessment of future prospects in the world’s major agricultural commodity markets. The market assessments for all the commodities are based on a set of projections that are conditional on specific assumptions regarding macroeconomic factors, agricultural and trade policies and production technologies; they also make assumptions about average weather conditions and longer-term productivity trends. Using the underlying assumptions, the Agricultural Outlook presents a

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plausible scenario for the evolution of agricultural markets over the next decade and provides a benchmark for the analysis of agricultural market outcomes that would result from alternative economic or policy assumptions. A partial equilibrium modelling system, based on the OECD’s Aglink and the FAO’s Cosimo models, facilitates the assurance of consistency in the projections. The fully documented Outlook database, including historical data and projections, is available through the OECD–FAO joint Internet site at www.agri-outlook.org. World reference prices in nominal terms for almost all agricultural commodities covered in the OECD–FAO Agricultural Outlook are at or above previous record levels, though when measured in real terms several products can be seen to have exhibited higher peaks in the past. This situation is not expected to last. Over the period covered by the Outlook (2008–2017), a strong combination of supply response and continued growth in demand is expected to keep prices above historical levels, but well below the current peaks (Figure 5.7). Prices will gradually come down because of the transitory nature of some of the factors that have contributed to the recent hikes. But there are also longer-term factors that will work to keep prices at higher average levels and reduce the long-term decline in real terms. Worldwide, the areas planted with wheat and coarse grain are expected to increase somewhat with medium-term yield growth expected to follow historical growth trends. Oilseeds prices are expected to remain strong, though slightly lower than in 2008. Current high prices are expected to bring about a supply response that results in more land being allocated to this sector and good growth in yield. In addition, palm oil production is expected to increase by 40 per cent. Rice production is expected to grow modestly with continued growth in productivity offsetting a small decrease in the area planted. Demand for cereals for use as feed stocks in biofuel production is projected, under current policies, to almost double between 2007 and 2017, but most of the future growth in total use is explained by rising demand for food and feed, particularly in countries outside the OECD area, which are experiencing strong economic growth (Figure 5.8). Little rice is used for feed and almost none in biofuel production. Demand for rice, almost all for food use, is expected to increase by less than 1 per cent per year and is dominated entirely by growth in developing countries. The use of vegetable oils for biofuel production is forecast to account for more than a third of the expected growth in use of vegetable oil from 2005 to 2017, and other uses are also expected to grow substantially.

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100

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Figure 5.7. World commodity prices in nominal and real terms, 1998–2007 and 2008−2017 Note: SMP: skimmed milk powder. Source: OECD–FAO Agricultural Outlook database 2008.

Income growth drives much of this expansion in demand, with countries outside the OECD area expected to increase their consumption of vegetable oils by 50 per cent. Based on these market developments, the OECD–FAO Agricultural Outlook projects nominal prices for cereals, rice and oilseeds to be, on average, 35 to 60 per cent higher than for the past decade. Prices in real terms are projected to be 10 to 35 per cent higher. Productivity gains and increasing competition in trade from countries outside the OECD area will eventually overtake stronger demand. As that happens, prices will resume their decline in real terms, though more gradually than in the past.

What if the assumptions are changed? The price projections discussed here assume normal weather, unchanged policies, and stable economic performance. Looking at alternatives to these assumptions provides additional insights regarding the factors influencing future prices. The key results of five alternative scenarios are summarised as follows (Figure 5.9):

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100% Imports in 2015–2017 compared to the 2005–2007 average 80%

60%

40%

20%

OECD

SMP

WMP

Cheese

Butter

Poultry

Pigmeat

Beef

Veg. oil

Oilmeals

Oilseeds

Rice

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–20%

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0%

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Figure 5.8. Imports 2015–2017 and 2005–2007 by commodity, OECD and developing countries Note: SMP: skimmed milk powder; WMP: whole milk powder. Source: OECD–FAO Agricultural Outlook database 2008. *

*

*

*

If biofuel production is assumed to remain at 2007 levels, rather than doubling over the next ten years as expected, the projected prices for coarse grains would be 12 per cent lower and for vegetable oil 15 per cent lower in 2017 than currently expected. If it is also assumed that oil prices stay at their 2007 level over the next decade, projected prices for wheat and maize would fall by a further 10 per cent and for vegetable oil by a further 7 per cent. If the rates of growth in GDP in Brazil, China, India, Indonesia and South Africa are then reduced to half the rate assumed in the Outlook, the projected prices of wheat and coarse grains would fall by a modest 1 to 2 per cent more, but vegetable oil prices would fall by a further 10 per cent. If the US dollar exchange rates were progressively appreciated to reach rates in 2017 some 10 per cent higher than was assumed for the baseline, by 2017 projected US dollar prices of wheat, coarse grain and vegetable oil would all be some 5 per cent below the corresponding baseline projection.

causes, consequences and policy responses Wheat

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Vegetable oil

0 –0.05 –0.1 –0.15 –0.2 –0.25 –0.3 –0.35 –0.4 –0.45 –0.5 Scenario 1 : Biofuel production constant at 2007 level Scenario 2 : Scenario 1 + Oil price constant at 2007 level (72$) Scenario 3 : Scenario 2 + Lower income growth in China, India, Indonesia, South Africa, Brazil (half annual growth rate) Scenario 4 : Scenario 3 + exchange rate/inflation held constant at 2005 level Scenario 5 : Scenario 4 + yield for wheat, oilseeds, coarse grains 5 % higher than over the projection period

Figure 5.9. Sensitivity of projected world prices to changes in assumptions, percentage difference from baseline values, 2017 Source: OECD–FAO Agricultural Outlook database 2008.

*

Finally, if it is also assumed that yields of cereals and oilseeds are 5 per cent higher than expected, projected wheat and maize prices would be a further 6 per cent and 8 per cent lower, respectively, but there would be little further change in vegetable oil prices.

All these assumptions tend in the same direction, towards lower prices, and taken together would lead to prices for wheat, coarse grains and vegetable oils that are 20 to 35 per cent lower in 2017 than what is now projected. It is unlikely that these factors would all combine in the configuration described above, but it serves to illustrate the relative significance of some of the factors that will determine future price levels. Of course, alternative scenarios that could push prices back up could also be envisaged – an equivalent production shortfall in a major exporting country again this year, for example, would be expected to lead to prices that remain near current levels.

What are the impacts on developing countries? Increases in the prices of agricultural commodities are making headlines and there is much debate and concern about the implications for food

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prices. While this affects all consumers, it is a particularly critical issue for developing countries where much of the population has income levels that are at or below subsistence levels. The problem is more one of affordability of food than of accessibility. The direct links between current commodity prices and retail food prices are often difficult to identify without an analysis of the food production and distribution structure as well as the relative costs of inputs. For trading countries, the link between international commodity markets and prices in local currency depends on a number of factors, including exchange rates and border transportation costs, as well as the structure of the food distribution system. The higher the degree of food processing, the lower will be the share of the raw commodity in the final retail price. Farm gate prices of agricultural commodities in developed countries commonly account for 25 to 35 per cent of the final retail price. In developing countries, these percentages are higher as the share of processed goods in the food basket is generally small; thus the increases in commodity prices are likely to be more directly transmitted through to retail food prices. This fact, coupled with the larger share of income spent on food, implies that the rise in prices of agricultural commodities has a significant impact on consumers in developing countries. In the 2008 edition of the OECD–FAO Agricultural Outlook, an analysis of the impact of rising commodity prices on food prices is presented, based on a comparison of the food price index (based on a fixed basket of foods consumed in urban areas of the entire country) with the overall inflation rates (the consumer price index (CPI)). For developed countries, where the share of food in the total consumer basket is small and where food price inflation is moderate, the increase of the food price index contributed only one percentage point to the overall increase in CPI. In sharp contrast, the impact in developing countries is much larger, accounting for about three-quarters of the rise in the CPI in countries as diverse as Senegal, China and Bangladesh (Figure 5.10). For the urban poor, often with incomes of little more than US$ 2 per day, the situation is particularly distressing as they generally have no access to land to produce even part of their food requirements.1 The impact of high food prices on developing countries depends on the interplay of various factors. In general, commercial producers of 1

See Chapter 2 for a discussion of the impact of price rises on the poor at the household level.

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12 Non-food

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0

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Figure 5.10. Food price contribution to consumer price inflation for selected countries Source: OECD–FAO Agricultural Outlook database 2008.

these commodities will benefit directly from higher prices, as, in many cases, will the people they employ (assuming, of course, that governments do not prevent higher prices on world markets from being transmitted to domestic markets).2 Livestock producers, on the other hand, are squeezed by both higher feed and energy costs and relatively flat prices. For farm households producing mainly for their own consumption or for local markets insulated from price fluctuations on national and international markets, the impacts will be mitigated. But for the urban poor and the major food-importing developing countries, the impacts will be strongly negative as an even greater share of their limited income will be required for food. The FAO index of food prices rose by 9 per cent in 2006, by 23 per cent in 2007 and by 54 per cent in 2008 (April to April 2007–08) (FAO 2008). FAO forecasts that the world will spend US$ 1,035 billion on food imports in 2008, US$ 215 billion more than in 2007. Each 10 per cent increase in the prices of all cereals (including rice) adds nearly US$ 4.5 billion to the aggregate cereals import bill of those developing countries that are net importers. 2

Trade policy measures, such as import tariffs, also affect the price of imported commodities. These tariffs can be reduced by governments so as to limit price increases, as was the case for rice in Bangladesh and Indonesia. Alternatively, in the face of rising domestic prices of key commodities, exporting countries such as India and Vietnam put in place export bans (or taxes) when prices reached what were deemed to be unacceptable levels.

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The UN High Level Task Force on the Global Food Crisis has highlighted the vulnerability of households, governments and the international system to food insecurity, including the ability to achieve the Millennium Development Goals (MDGs), in particular those related to poverty reduction and hunger alleviation (UN High Level Task Force 2008). According to a new World Bank poverty estimate, by the end of 2008 1.4 billion people were living on less than US$ 1.25 per day, 400 million more than earlier estimates. According to the FAO estimates for late 2008, 75 million more people were below the hunger threshold because of higher food prices, pushing the total to 923 million. Overall, access to affordable food and nutrition is a problem for hundreds of millions of people in developing countries. This situation can have international repercussions. Higher and more volatile prices combined with government measures to restrict exports and control prices are undermining confidence in the role of global trade in ensuring food security. This loss of confidence could result in reduced support for trade liberalisation and a return to national food security policies based on domestic production and stocks, which tend to limit agricultural growth and generally exacerbate food insecurity.

Appropriate trade policy responses The immediate problem is one of food affordability rather than accessibility – food supplies are adequate but the poor cannot afford to buy. Humanitarian aid is the evident short-term response but poverty reduction is the real challenge. Can trade reform help? Countries can, to some extent, trade their way out of poverty. There is considerable evidence to show that developing economies have experienced rapid and sustained growth following domestic trade reforms, while this is not the case for closed economies. Of course, market openness alone is not sufficient for economic growth – as a minimum one needs political stability, the right macroeconomic environment, accommodating infrastructure and a well-functioning institutional framework. Improved market structure would contribute to more efficient price transmission and to more efficient allocation. In fact, the existence of well-functioning markets (product and factor markets) is the first prerequisite if trade liberalisation is to have any effect at all. The standard argument for removing trade barriers and subsidies is that it allows a more efficient allocation of resources and allows nations to exploit their comparative advantages. Freer trade can also provide

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greater scope for achieving economies of scale, improve the competitiveness of domestic markets, increase the variety of products available to consumers, enhance technological gains, strengthen capacity to deal with natural disasters and reduce rent-seeking from protected groups. Trade liberalisation also tends to reduce price volatility because it increases the size of markets that can buffer supply and demand swings. It is often argued that developing countries benefit from the agricultural support policies of industrialised countries because they are net food importers and these policies generally depress world prices by stimulating production and reducing consumption. While there is considerable diversity, Valdés and McCalla estimated that about 60 per cent of developing countries were net agricultural importers while over 70 per cent were net food importers (Valdés and McCalla 2004). Developing countries overall were generally net agricultural exporters before 1980 (Figure 5.11). Since 1980, there has been a trend towards a negative agricultural trade balance. This trend is likely to continue for the foreseeable future. FAO projects that developing countries as a whole will have a net food trade deficit of more than US$ 50 billion (in constant 1997–1999 US$) by 2030, as increasing populations and incomes outstrip production growth (FAO 2004). In terms of product composition, developing countries are clearly importers of products which figure predominantly in the agricultural support policies of industrialised countries, such as rice, sugar, cereals, and milk products. These facts are well known. So it is not surprising that some critics suggest that developing countries as food importers would, in fact, lose rather than gain from further trade liberalisation resulting in generally higher agricultural prices. (In fact, with current much higher prices, liberalisation of tariffs would probably not drive international prices up much further.) The reference situation has changed considerably from that used by the OECD and others in analyses of the impacts of trade liberalisation. Subsidy reductions might still raise international prices somewhat, but they would have less impact, and already in some cases current high prices have even reduced subsidies (e.g. market price support). In addition, they argue that developing countries currently benefit from non-reciprocal preferential market access in developed countries (including for some agricultural products), which could be eroded in trade negotiations. Similarly, developing countries may defend their own agricultural protection for a number of reasons – to stabilise food prices, to provide food security or promote self-sufficiency, to raise farm incomes and to slow rural population outflows. But all these policy objectives can generally be achieved more efficiently by other means.

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USD billion

10 5 0 –5 –10 –15 –20 19 61 19 6 19 3 6 19 5 67 19 6 19 9 71 19 73 19 7 19 5 77 19 7 19 9 81 19 8 19 3 8 19 5 87 19 8 19 9 91 19 93 19 9 19 5 97 19 9 20 9 01 20 03

–25

Developing countries, Agr Products Developing countries, Food and Animals

Figure 5.11. Net trade in agriculture, developing countries and least-developed countries, 1960–2003 Source: FAOSTAT

It is true that more recent quantitative analysis of the economic impacts of trade liberalisation show much lower welfare gains for developing countries than reported in earlier studies, due in part to their changing trade status and agricultural policy reforms (towards more decoupled and targeted payments). But virtually all empirical analysis suggests global welfare gains from multilateral trade liberalisation and a number of studies have shown that developing country welfare gains from preferences are limited; that most preferences are shallow, while deep preferences tend to be restricted to a small number of products and beneficiary countries (Tangermann 2005). It can even be argued that protectionism hurts the poorest countries the most because agricultural exports tend to be more important to their economic welfare as these economies are more dependent on agriculture, have fewer alternatives and are least able to compete with subsidies in rich countries. Most studies show that market access is the most important reform and that domestic reforms (decoupling or better targeting) are primarily beneficial to the country undertaking the reforms (Bouët 2008).3 Export 3

See Frank van Tongeren (OECD), notes for a presentation to the WTO/ESCAP Regional Seminar on Agricultural Negotiations for Asia Pacific Economies, Bangkok, 28–29 November 2007.

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subsidies are relatively less important and it is recognised that reductions could hurt some food importers. It is generally recommended that some form of transfers (adjustment facilitation) should be considered where trade liberalisation results in losses to developing countries.

Policy responses of developing countries The 2008 World Development Report (World Bank 2008) makes a strong case for trade reforms within developing countries. Twenty years ago, World Bank research showed severe anti-agriculture, anti-trade biases in price and trade policies in many developing countries, including some of the poorest in Africa. Agriculture export taxes hurt farm households as did manufacturing protection and overvalued exchange rates. However, the 2008 report argues that much reform has taken place, but that the anti-development bias of trade distortions remains (see Chapters 7 and 11). While there have been some welcome reductions in import tariffs, a common response to the recent high prices of agricultural commodities and food has been export restrictions and price controls. Of the 120 developing countries monitored by the World Bank during 2008, almost one-quarter had introduced export restrictions (Figure 5.12). Trade restricting policies – whether they restrict exports or imports – have undesirable and often unintended impacts, especially in the medium and long term. Subsidies that distort markets are equally unhelpful. Export

Percentage of countries

60 50 40 30 20 10 0 Reduce Increase Export Price foodgrain foodgrain restrictions controls/ taxes stocks consumer subsidies

None

Figure 5.12. Incidence of food price policies in developing countries (% of 120 countries) Source: Zaman et al. 2008.

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taxes and embargoes may in the short term provide some relief to domestic consumers, though such measures do not distinguish between low- and high-income consumers, and they also impose a burden on domestic producers and limit their supply response. Export restrictions contribute to uncertainty in the global commodity market and drive international market prices further up. On the import side, ‘protecting’ domestic producers of agricultural commodities by providing high price support and border protection restricts growth opportunities for producers abroad and imposes a burden on domestic consumers (see Chapter 12). There have also been some positive developments on export restrictions. According to World Bank figures, the number of countries with export controls had gone down from 40 to 28 by late 2008. Major potential exporters such as the Ukraine, Vietnam, Russia, Kazakhstan and India were lifting or moving towards lifting their bans. More effective and efficient are safety-net type programmes that are better targeted to those most in need while having less distorting impacts on markets. According to the World Bank, many developing countries were making wide use of such programmes. Cash transfers and schoolfeeding schemes were more common than food for work or food rations or food-stamp schemes (Figure 5.13).

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Figure 5.13. Incidence of safety net programmes in developing countries (% of 120 countries) Source: Zaman et al. 2008.

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Agricultural policy reforms in OECD countries The 2008 OECD report, Agricultural Policies in OECD Countries: At a Glance, shows that government support to farmers in OECD countries was US$ 263 billion for the 2005–2007 period (OECD 2008a). This represented 26 per cent of total farm receipts, down from 37 per cent for the 1966–1968 period, when OECD estimates began (Figure 5.14). The latest fall was mainly due to the rise in farm commodity prices. With higher world prices, lower levels of support and subsidies were needed to prop up domestic prices. The report calls on governments to seize the opportunity offered by higher farm incomes to remove the most tradedistorting measures which still dominate agricultural policies in many OECD countries. The current situation of high world prices could offer opportunities to reform policies that would have an impact on international markets. In so far as the increase in world prices is a long-term structural phenomenon, current price-related support policies do not create any additional incentives to enhance production in cases where world prices are above administered price levels. Moreover, if higher prices persist, governments also have the opportunity and the time to design and implement alternative safety-net type measures that are no more trade-distorting than necessary. Where world prices are high enough to generate a domestic production response, it may also be opportune to consider lifting production controls where they exist (unless they are targeted to environmental or other nonmarket concerns). Low world prices have been held responsible in the past for preventing some developing countries from realising their full agricultural potential and many of these countries now rely on food imports. Improving the terms of trade by a permanent reduction of import barriers and export restrictions would contribute to providing incentives for producers in countries that have a longer-term potential to increase production. The report warns governments against recourse to additional trade restrictions in the current situation – whether they relate to exports or imports. Such measures merely add to price volatility and uncertainty as they limit the capacity of global commodity markets to adjust. It welcomes continuing efforts to weaken the link between government support and farm production, a change that will enhance the ability of markets to match supply with demand. Criteria such as land area or animal numbers are increasingly being used as the basis for payments although on average in OECD countries nearly 60 per cent of support is

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Figure 5.15. OECD: Composition of producer support estimate (percentage share in PSE) Note: A, area planted; An, animal numbers; R, receipts; I, income. Source: OECD, Producer Support Estimate (PSE) and Consumer Support Estimate (CSE) database 2008.

still based on production (Figure 5.15). Despite a visible reduction in both the level of support and the share of the most distorting forms of support in the majority of OECD countries, the most production- and trade-distorting support continues to dominate. Also, reform has been uneven across countries – some countries are more advanced in implementing more decoupled support, while others are only at the beginning of the process. There is also some movement towards the development of much more fine-tuned policies, targeted to the achievement of specific objectives or to the resolution of specific problems affecting the sector. Another indication of how agricultural policy is evolving is that around 30 per cent of support is now provided with various constraints on use of inputs, specific production practices or other environmental and societal

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criteria. This share is increasing but more can be done to improve the efficiency and equity of farm policies by ensuring that support is used to tackle specific policy objectives. The overall reduction in price support has also meant that a smaller burden of agricultural support is borne by consumers. As a percentage of consumption expenditure (measured at the farm gate) the Consumer Support Estimate (the CSE) fell virtually everywhere in the OECD area. High world market prices resulted in a narrower domestic-to-border price gap, leading to a smaller CSE at a time when consumers in many countries are experiencing pressure on household budgets as food prices soar. A lower CSE simply means that the share of consumer food costs that result from government price support policies has fallen, not that consumer expenditures are lower.

A reconsideration of biofuel support policies In the case of both wheat and coarse grains, and vegetable oils, biofuels have been a major factor behind supply imbalances. Biofuel support policies that encourage increased production and use of biofuels are raising questions, in part because of the unintended impacts on food prices. OECD analysis to date suggests that the energy security, environmental, and economic objectives of biofuel support policies, costing some US$ 11 billion per year (projected to rise to US$ 25 billion per year by 2013–2017), are unlikely to be met through (first-generation) biofuels production based on agricultural commodity feed stocks.4 Alternative approaches (for example, that encourage reduced energy demand and GHG emissions, provide for freer trade in biofuels, and accelerate the introduction of ‘second-generation’ production technologies that do not rely upon current feedstock commodities) offer potentially greater benefits without the unintended impact on food prices. The price effects attributable to biofuel policies derive largely from increased demand for cereals and vegetable oils. The OECD biofuel report suggests that full removal of support policies would reduce global production of ethanol and biodiesel on average by 14 per cent and 60 per cent, respectively, by 2013–2017. Thus the use of feedstock commodities would be substantially lower. While, in absolute terms, the use of grains would be reduced most significantly (use of US maize for ethanol would 4

OECD (2008b). With support policies costing an estimated US$ 25 billion per year by 2013–2017, policy support to biofuels would cost US$ 1000–1700 per tonne of greenhouse gas (GHG) emissions saved (CO2 equivalent).

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Figure 5.16. Impact of removal of biofuel support on world commodity prices, 2013– 2017 average Note: The relative impact of removing different policies depends on the order of removal as indicated in the text. Source: Aglink//Cosimo Simulation Results, OECD Secretariat.

be lower by more than 23 million tonnes per year and use of wheat for EU ethanol production would be lower by almost 16 million tonnes), the effect relative to global production is most pronounced in the vegetable oil markets. The EU alone would use almost 10 million tonnes of vegetable oils less in the biodiesel sector per year on average during the 2013–2017 period, which is equivalent to 8 per cent of global production. In consequence, international prices for vegetable oils would be, on average, about 16 per cent lower than under baseline assumptions, and those for wheat and coarse grains by some 5 per cent and 7 per cent, respectively (Figure 5.16). Due to the offsetting effect of higher prices for oilseed meals (animal feed), world oilseed prices would drop by only 3 per cent. Sugar prices, in contrast, would gain slightly, as Brazilian ethanol producers could take advantage of eventually higher ethanol prices, and as the slightly lower molasses-based ethanol production in a number of African and Asian countries would reduce sugar supply.

What are the key messages? Crisis is a very strong and negative characterisation of the current agricultural market and food price situation. For many farmers, higher agricultural prices represent welcome relief from a long-term decline in real prices. The prospects of higher prices and improved profitability over the medium term suggest that agricultural sectors may be able to attract badly needed public and private investment. Of course for the poor and for food-importing countries, higher food prices pose

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immediate problems with serious implications for the global fight to reduce poverty and alleviate hunger, not to mention the balance of payment and trade policy problems this situation is causing for those developing economies most affected. The OECD–FAO medium-term agricultural outlook (OECD–FAO 2008) predicts that nominal agricultural prices will decline from current record high levels but remain 35 to 60 per cent higher, on average, than during the previous decade. Energy prices, biofuels feedstock use and increasing demand for food from emerging economies are all seen as relatively permanent factors exerting upward pressure on commodity prices. Price volatility could also increase with tight markets that are expected to remain in place for many commodities. For developing countries, increasingly dependent on food imports and faced with irate consumers, a common response has been to restrict exports, lower import tariffs and introduce price controls. But these national trade policies merely exacerbate the situation by further distorting markets already influenced by the support policies of developed countries. Such measures send the wrong signals to producers and hinder the desired supply response to higher prices, while interrupting food supplies in other developing countries. More secure global food supplies will only come from allowing competitive producers around the world to have the freedom to respond to current market opportunities. In the short term, immediate and substantial humanitarian aid is required, where appropriate in the form of cash or vouchers, so as to strengthen, rather than undermine, domestic markets in the recipient countries. In the medium term, policies are needed to improve the purchasing power of poor consumers through fostering economic growth and development (e.g. education, health, and social protection programmes). There is also an urgent need to enhance agricultural production and productivity through research, adoption of technology, development of infrastructure and institutional reform with special focus on access of small farmers to markets. Decreasing the very high marketing margins in developing countries, and thereby allowing agricultural producers to capture a higher proportion of market prices, may be much more effective for economic growth and poverty reduction than trade liberalisation. Some of the longer-term influences on food prices, such as the potential impact of climate change on production and yields and the role of energy prices, should be examined. Biofuel support policies that are having a major impact on the grain and oilseed markets warrant a closer look. Market-based regulation of speculative activities, options

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for shared public grain stocks and more effective food import financing schemes are additional issues that should be investigated. Agricultural trade policies require further reform. Now, more than ever, it is important to counter growing calls for trade protectionism. A resumption and conclusion of the Doha Round of negotiations at the WTO would be the most desirable development towards eliminating agricultural trade barriers around developing countries and allowing markets to balance global supply and demand. In the meantime, expanding aid-for-trade initiatives would help many developing countries to overcome their supply capacity constraints and to access existing markets more effectively. References Bouët, Antoine 2008. ‘The Expected Benefits of Trade Liberalization for World Income and Development, Opening the “Black Box” of Global Trade Modeling’, Food Policy Review No. 8. International Food Policy Research Institute. Food and Agriculture Organization of the United Nations (FAO) 2004. The State of Agricultural Commodity Markets. Rome: FAO. ——2008. FAO Food Outlook. Rome: FAO. International Grains Council (IGC) 2008. Grain Market Report, No. 380, 31 July. London: IGC. Organisation for Economic Co-operation and Development (OECD) 2008a. Agricultural Policies in OECD Countries: At a Glance. Paris: OECD. ——2008b. Biofuel Support Policies: An Economic Assessment. Paris: OECD. Organisation for Economic Co-operation and Development–Food and Agriculture Organization of the United Nations (OECD–FAO) 2008. OECD–FAO Agricultural Outlook 2008–2017. Paris: OECD–FAO. Tangermann, Stefan 2005. ‘OECD Area Agricultural Policies and the Interests of Developing Countries’, American Journal of Agricultural Economics 87: 1128–44. UN High Level Task Force on the Global Food Crisis 2008. Comprehensive Framework for Action, July. New York: United Nations. Valdés, A. and McCalla, A. F. 2004. ‘Where the Interests of Developing Countries Converge and Diverge’, in Ingco, M. D. and Winters, L. A. (eds.), Agriculture and the New Trade Agenda: Creating a Global Trading Environment for Development. Cambridge: Cambridge University Press, pp. 136–48. World Bank 2008. World Development Report. Washington, DC: World Bank. Zaman, H., Delgado, C., Mitchell, D. and Revenga, A. 2008. Rising Food Prices: Are there Right Policy Choices?’, Washington, DC: Development Outreach, World Bank.

6 Shift and swing factors and the special role of weather and climate josef schmidhuber and ira matuschke* 1.

Introduction

The Food and Agriculture Organization of the United Nations (FAO) defines food security as a ‘situation that exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life’ (FAO 2002). This definition comprises the four key dimensions of food security: availability, stability, utilisation and access. The first dimension relates to the availability of sufficient food, that is, to the overall ability of the agricultural system to meet demand for food. The second dimension, stability, relates to individuals who are at high risk of temporarily or permanently losing their access to the resources needed to consume adequate amounts of food, either because these individuals cannot insure ex ante against income shocks or they lack the resources to smooth consumption ex post or both. An important cause of unstable access to food is climate variability. The third dimension, utilisation, encompasses all aspects of food safety and quality of nutrition. Its subdimensions are therefore related to health, including the sanitary conditions along the entire food chain. It is not enough that someone is getting what appears to be an adequate quantity of food if that person is unable to use the food properly (Schmidhuber and Tubiello 2007). The fourth dimension, access, covers access by individuals to adequate resources (or entitlements) to acquire appropriate foods for a nutritious diet. Entitlements are all legal, political, economic and social rights that enable a person to gain access to food. Thus a key element in this respect is the purchasing power of consumers and the evolution of real incomes and food * Josef Schmidhuber, Head of the Global Perspective Studies Unit, Food and Agriculture Organization of the United Nations (FAO), Rome, Italy. Ira Matuschke, Associate Professional Officer, Global Perspective Studies Unit, FAO, Rome, Italy.

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prices (Schmidhuber and Tubiello 2007). From a very long-term perspective and in an efficient market environment, access dominates all other dimensions of food security: at sufficiently high income levels, a lack of availability of locally produced food can be bridged through increased imports. Temporary swings in prices and food supplies can be overcome through increased stockholdings or improved risk management, whereas food utilisation issues can be addressed by investment in improved hygiene and food safety measures (Schmidhuber and Müller, forthcoming). The 2007–2008 food crisis powerfully demonstrated that food security is at the heart of national security in many developing countries. For instance, during the first four months of 2008, international prices of all major food commodities reached their highest nominal levels in nearly fifty years, while prices in real terms were the highest in nearly thirty years. These large swings in international food prices undermined the ability of many developing countries to feed themselves. This caused hunger, protests, riots and even fears for international security. Lowincome countries with food deficits were hit the hardest. In the aftermath of the food crisis, many important questions have been raised: for example, how can the problems of the most needy be addressed, in order to avoid a deeper and more widespread crisis? How can the food security situation be improved and the adverse impacts of high prices on nutrition be limited? How can food price inflation be restrained and a lasting improvement in national food security be achieved, while maintaining incentives for producers and creating a supportive market environment? What will be the future threats to global food security? Some of these important questions are addressed in this book. The objectives of this chapter are twofold: first we aim to examine the causes of the 2007–2008 food crisis. To do this we will differentiate between long-term trend and short-term swing factors. Without gauging the precise impacts of the various factors, we will discuss their relative importance and try to debunk the myths that surround the frequently quoted factors such as China and India as maverick buyers of large quantities of agricultural produce. The second objective is to put the effects of weather variability and climate change into the context of the 2007–2008 price spike and to quantify their impacts on prices and food security. Climate change will affect all four dimensions of food security: it will alter food production directly through its impact on growing conditions. It will also alter the distribution and growth of incomes, thereby changing the pattern of demand for food. Climate change will also affect food utilisation through its impact on vectors of pests and diseases, and it

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will influence the availability of food through increases in the frequency and severity of weather-related shocks. Understanding these complexities can be a basis for developing strategies for adaptation and mitigation in response to climate change. The remainder of this chapter is organised as follows. Section 2 considers the swing and shift factors that contributed to the sharp increase in food prices during the 2007–2008 food crisis. Section 3 then focuses on the effects of weather variability and climate change. The discussion is organised around the various climate change scenarios that have been presented by the Intergovernmental Panel on Climate Change (IPCC). The analysis will focus on the different dimensions of food security and how they are likely to be affected by various agro-ecological and socioeconomic changes that could be brought about by climate change. Section 4 concludes.

2.

Swing and shift factors of price changes in global agriculture

Changes in prices stem from shifts in supply and demand. In food and agricultural markets, the responsiveness of supply and demand strongly depends on the time frame within which these shifts take place: in the short run, supply and demand for agricultural products are inelastic and do not respond much to price changes. In the long run, on the other hand, typical supply shifts result from productivity gains, while longterm shifts in demand mainly stem from population and income growth, urbanisation or changes in food consumption patterns. It is important to separate these long-term shifts from the short-term shocks: long-term shifts typically cause trend developments, while shocks are responsible for the swings around these trends (see also Chapter 3). This section therefore provides a clear distinction between swing and shift factors as well as demand and supply factors. Since correctly measuring the precise impacts of various factors on price behaviour is an extremely difficult task, this section scrutinises the main facts that characterised past shifts and shocks in a qualitative way. In addition, we also endeavour to debunk some of the myths and misperceptions that emerged in discussions of the causes of the 2007–2008 food crisis.

Short-term swing factors Supply-side factors Stocks play a key role in equilibrating markets and smoothing price variations. If stocks are low relative to utilisation, prices tend to rise.

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Figure 6.1. World cereal stocks, 1981–2008 Note: Weight measurements are in tonnes. Source: FAOSTAT

The level of stocks, mainly of cereals, has been falling since the mid1990s. Since the last high-price event in 1995, global stock levels have declined by 3.4 per cent per year. As consumption has increased, the ratio of stocks to total utilisation has fallen even faster and it reached a historic low in 2008 (Figure 6.1). A number of changes in the policy environment have brought about this drop. They include: (a) the reform of support policies – particularly in the European Union and the United States – and the departure from intervention purchases by public institutions; (b) the development of less costly instruments of risk management; (c) the demand for biofuels as a new ‘vent for surplus’; and (d) improvements in information and transportation technologies, which have reduced the need to have large stocks. The relatively calm market situation at the beginning of this decade made these lower stock levels appear sufficient as a market buffer. But as they continued to decline and new demands emerged, stock levels eventually became too small to buffer the more pronounced shortfalls in supply. Wide swings in prices in 2007 and 2008 ensued and continuing low stock

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levels will keep prices high and volatile for some time. By the close of the growing seasons for cereals ending in 2008, world cereal stocks are expected to decline a further 5 per cent from their already reduced level at the start of the season and to reach their lowest levels in twentyfive years. The ratio of world cereal stocks to utilisation is expected to fall to 18.8 per cent, down 6 per cent from the previous low in 2006–2007. Stock-to-use ratios for wheat even hit historic lows. In parallel, the stock situation for oils/fats and meals/cakes began to deteriorate in mid-2007 after the spill-over effects from developments in the cereals markets, especially of wheat and coarse grains, with the stock-to-utilisation ratio expected to fall from 13 to 11 per cent for oils/fats and from 17 to 11 per cent for meals/ cakes by the end of the 2007–2008 season. While low stocks per se are not an independent (exogenous) factor for high prices, they have made markets more sensitive to shocks. A typical example of a short-term supply shock is a sudden deterioration in weather conditions. Directly measuring a change in average global weather conditions is a difficult, if not an impossible undertaking. But changes can be measured indirectly by examining global trends in yield and measuring deviations from this trend. All other factors that affect yield (such as fertiliser and pesticide applications, or irrigation) are assumed to remain unchanged. Examination of actual yield trends for cereals reveals a differentiated picture: in recent years global yields of wheat have indeed fallen below their past trends (Figure 6.2). The most affected countries are easily spotted: they include Australia, a major wheat exporter, which suffered two consecutive droughts and subsequently two sharp drops in yield in 2006 and 2007. Morocco experienced an outright failure of its wheat crop in 2007 and the Ukraine reported a very poor wheat crop due to unfavourable weather conditions (FAO 2008a). In 2005, all three countries together contributed about 20 per cent of the global volume of wheat traded, while in 2007 their contribution to the global wheat trade was about 8 per cent. In market environments of low stocks, such production shortfalls certainly contributed to the price spike in 2007–2008, which culminated in futures prices for wheat of more than US$ 13/bushel by the end of March 2008. However, while the weather seems to be one factor in spiking prices for wheat, no such effect is discernible for coarse grains. On the contrary, average global yields of coarse grain have remained above their longterm trend over the past four years (Figure 6.2). Whether these higher yields can be completely ascribed to good weather is still unclear, but anecdotal evidence of good growing conditions in the main growing areas corroborates the hypothesis of overall good growing conditions.

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Figure 6.2. Global cereal yields, 1979–2007 Note: Weight measurements are in tonnes. Source: FAOSTAT

Another major supply-side shock was the dramatic increase in oil prices beginning in 2003. Essentially all economic sectors were affected, agriculture in particular. Average input prices doubled; prices of some fertilisers (e.g. triple superphosphate and muriate of potash) increased by more than 160 per cent in the first few months of 2008 compared to the same period in 2007. Overall, the increase in energy prices has been rapid, steep and comprehensive, with the Reuters-CRB energy price index more than tripling since 2003 (FAO 2008a). The oil price shock also affected agricultural markets through its effects on the transportation sector. Average freight rates doubled within a oneyear period beginning in February 2006. Ocean freight rates for grains transported from the United States to Europe almost trebled, surging from about 34 €/ tonne to nearly 90 €/ tonne (FAO 2008b). This effectively re-regionalised international agricultural markets, particularly for bulk commodities. It also created substantial regional price differentials and meant that trade could no longer fully play its vital role in international food security by matching local deficits with local surpluses. As prices on the international markets surged during the second half of 2007, many countries became increasingly concerned about the security of

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their domestic food supply. Food price inflation became an increasingly worrisome burden for entire economies and hurt the poorest population segments in particular. In some countries, worries about possible physical shortages of foodstuffs emerged, even compromising the availability of subsidised supplies through safety nets. Protests, riots and general social unrest ensued. To ward off deeper and more serious consequences, many governments resorted to trade policy measures to curtail price increases and ensure adequate supplies on domestic markets (see also the discussion in Chapters 2, 10 and 12). In the case of food-exporting countries, the measures put into operation ranged from export taxes to quantitative export restrictions to outright bans on exports. For importing countries, measures included the reduction of tariffs and, in a few cases, even the outright subsidisation of imports, i.e. negative import tariffs. FAO surveyed policy reactions in 77 countries. It found that more than 50 per cent of them had reduced grain import tariffs and about 25 per cent had imposed export controls of some kind – either in the form of taxes or of quantitative controls such as bans and quotas (FAO 2008c). From a perspective of short-term domestic food security, export restrictions may make perfect sense: they are cheap and easy to implement, and generally help achieve the stated objective of stabilising the domestic food situation. From an international perspective, however, they are highly counterproductive. They aggravate the international supply shortages, make markets more volatile and push up prices even further. De facto, they relegate a domestic food security problem to the international market and shift the brunt of the problem onto those countries which heavily depend on imports and cannot afford the higher food prices. In general, these are the low-income food-deficit countries, typically the countries already suffering from very high levels of undernourishment. The results of the FAO survey also indicate that the benefits of these measures may be short lived: while export taxes raised some additional government revenues initially, a number of exporting countries reported that lower domestic output prices coupled with high input prices have actually resulted in decreased plantings and may cause a further deterioration of the food security situation soon. Likewise, revenue losses have also been incurred due to the reduction of import tariffs, which often make an important contribution to overall budgetary resources.

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Demand-side shocks Demand shock factors contributing to the world food crisis of 2007–2008 are more difficult to spot. Unlike those for supply, changes on the demand side are seldom rapid or unexpected. The main reason for this is that demand in food markets is mainly driven by population and income growth, and both these factors evolve gradually rather than abruptly. In general, the situation during the 2007–2008 price surge does not depart from this trend. Neither food nor feed demand has exhibited a sudden or unexpected increase that would have merited the kind of price rises witnessed. The only discernible exception is the rapid expansion of demand for biofuel feedstocks (see also the discussion on biofuels in general in Chapter 5). This marks a clear departure from the patterns of gradual growth in demand for food and feed and therefore warrants closer inspection. Of the major food and feed commodities, additional demand for maize (a feedstock used in the production of ethanol) and rapeseed (a feedstock used for producing biodiesel) saw the steepest increases and thus probably had the strongest impact on prices. For example, of the nearly 40 million tonnes increase in total maize utilisation worldwide in 2007, almost 30 million tonnes were absorbed by ethanol plants alone. Most of this expansion occurred in the United States, the world’s largest producer and exporter of maize. Globally, some 12 per cent of all maize produced was used for ethanol manufacture in 2007 (FAO 2008a). In the EU, the biodiesel sector is estimated to have absorbed about 60 per cent of Member States’ output of rapeseed oil in 2007, which amounts to about 25 per cent of global production and 70 per cent of global trade in the commodity in that year. For both maize and rapeseed, the rise in demand for biofuels was sudden and massive and this helps to explain the steep rise in international prices observed since the beginning of 2007. From a longer-term perspective, rising energy prices may mean that agriculture becomes an increasingly important provider of (bio)energy. The energy market is so large and the demand for bioenergy is potentially so high that the energy market could completely change the traditional agricultural market systems. This may introduce a new paradigm for world agricultural markets (Schmidhuber 2006). If energy prices remain high and feedstock production for the energy market remains an economically viable activity, this will halt the long-term downward trend in real prices and create a vast demand potential outside the traditional food

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markets. If oil prices remain high or increase further, demand for bioenergy could create perfectly elastic demand for agricultural output at break-even price levels to the energy market (Schmidhuber 2006). In the long term it means that food will remain expensive as long as oil prices remain high. Discussions on high food prices have also included a growing interest in the possible effects of speculators and large institutional investors buying into agricultural commodities on futures markets. Indeed, the share of non-commercial traders taking long positions in the commodity markets has been going up, indicating increased interest on their part in buying futures contracts. Between 2005 and 2008, non-commercial traders almost doubled their share in open interests in the corn, wheat and soybean futures markets, while their share in the sugar futures market remained largely unchanged. Global trading activity in futures and options combined has more than doubled in the past five years. In the first nine months of 2007, this activity grew 30 per cent over the previous year. The renewed general interest in commodities as an investment class, so the theory runs, was sparked by the downturn in the global equity and property markets (OECD– FAO 2008). This high level of speculative activity in agricultural commodity markets in the past few years has led many analysts to associate increased speculation with the recent increases in food prices. Yet the situation is not very clear: there is uncertainty as to whether speculation on agricultural commodities is driving prices up or whether it is attracted by prices which are increasing anyway. A study by the International Monetary Fund (IMF) concluded that in general it was the high prices that were encouraging inflows of investment funds into futures markets for agricultural commodities (IMF 2006). There is nonetheless little doubt that speculators can play an important role in setting the price for agricultural commodities. If they do indeed manage to push prices up to unexpected heights, it can also be assumed that demand would contract and supply expand. Eventually, this would produce unsold supply and absorbing it would eventually require actual buying and increased holding of stocks. Higher stocks, however, are impossible to spot in the current market situation. This may still mean that speculators have caused or at least exacerbated short-term intra-seasonal price swings in futures markets, but there is little evidence that they have driven up inter-seasonal price trends on the spot markets.

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Long-term shift factors Shifters of demand trends As the world population has grown, demand for food has risen. Consumption has grown even faster than population, leaving room for increased per capita supplies and a change in diets; initially, this dietary shift represented a move away from roots and tubers to cereals; then, increasingly, from starchy staples to meat and other livestock products (Bruinsma 2003). In general, such changes are gradual and are thus unlikely to have caused the sharp and sudden spike in prices witnessed. But in rapidly growing economies such as those of India and China, it is claimed (von Braun 2007), dietary changes have come about so swiftly that they have caused an abrupt change in demand growth. Such abrupt changes in demand have been observed for many industrial products, notably for metals and ores, coal, gas and oil. But whether they really exist for food warrants a closer examination of the relevant facts, figures and trends. No doubt, emerging economies, particularly China and India, are playing an important role in global demand for and supply of agricultural commodities. The two countries are home to nearly 2.5 billion people – or 40 per cent of the world’s population – and thus account for a large share of global food demand. But there is no evidence that demand in either of these economies has grown faster than past trends. In fact, actual consumption estimates suggest that demand has grown below trend. But trade statistics, which are much more reliable than consumption estimates, also fully corroborate the findings for consumption trends. Cereal imports by China and India have even been showing a downward trend, falling by about 4 per cent per year since 1980, from an average of about 14 million tonnes in the early 1980s to roughly 6 million tonnes during the past three years (see Figure 6.3). The situation is somewhat different for oilseeds, for which China has emerged as a major buyer over the past decade, particularly for soybeans. Even though China has become a major importer of oilseeds, vegetable oils and livestock products, the country’s overall agricultural trade balance has remained largely positive in most years since the mid-1990s. Likewise, the long-term development in India’s trade position also runs counter to the belief that India is one of the drivers of increasing food prices in world markets.1 Even India’s relatively large imports of vegetable oils need to be considered in the context of equally large exports of 1

All data was retrieved from FAOSTAT.

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josef schmidhuber and ira matuschke 20 15

Million ton

10 5 0 –5 –10 –15 –20

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Year Net cereal imports, China

Net cereal imports, India

Figure 6.3. Net cereal imports by China and India, 1980–2007 Note: Weight measurements are in tonnes. Source: FAOSTAT

oilcakes. In sum, neither for China nor for India is there evidence that a sudden increase in imports of oilseeds, meals and oils has contributed to the hike in the prices of these commodities, which began in mid-2007, after the spike in the prices of grains (maize in particular) a year earlier, and neither China nor India can be held responsible for the sudden price spike in the overall commodity group of vegetable oils. This is not to downplay the role of China and India, or that of the long-term changes in consumption patterns. But the notion that these countries caused the spike in prices in 2007–2008 cannot be confirmed given the data presented (FAO 2008b).

Shifters of supply trends After having examined possible factors responsible for supply and demand shocks and having inspected trend developments in demand, we now turn to the factors determining the long-term trends in supply. The basic drivers are well known. In principle, long-term supply is determined by the amounts of productive agricultural resources (such as land, water and genetic potentials) available for production as well as the productivity of these resources, measured in terms of land yields and

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cropping intensity, uptake rates and carcass weights, or overall total factor productivity. Both the amounts of resources and their productivity are crucially dependent on the level and quality of investments. For developing countries, investment assistance from abroad plays an important role in these investments. Investment in developing countries’ agriculture lies at the heart of the long and impressive expansion of production in the second half of the twentieth century. In 1961, the world used about 1.4 billion hectares of land for crops, while it farmed only 1.5 billion hectares in 1998 to produce twice the quantity of grain and oilseeds. This essentially means that farmers succeeded in feeding almost twice as many people far better from virtually the same area of cropland. This was the result of far-sighted public investment in agricultural research in the 1960s and 1970s that initiated the Green Revolution and that was the main driver of the rapid expansion in agricultural outputs of many developing countries2 (Evenson and Gollin 2003 and Chapter 4 of this volume). Unfortunately, the success of public investments in agriculture was taken for granted. Investments in agricultural research began to level off in the 1990s and overseas development assistance (ODA) to developing countries’ agriculture experienced an outright collapse (see also the discussion in Chapter 11). Aid to agriculture fell from US$ 8 billion in 1984 to US$ 3.4 billion in 2004, representing a reduction in real terms of 58 per cent. Agriculture’s share of ODA fell from 17 per cent in 1980 to a mere 3 per cent in 2006 (OECD 2008). This lack of support held back growth in rural areas in many developing economies. It reduced the growth in the agricultural supply and contributed to the growing dependence of developing countries on imports. The effect was most noticeable in the least-developed countries, which now import twice as much agricultural produce as they export. Another important shifter that affected the longer-term trend of agricultural supply is the massive support and protection afforded to farmers in Organisation for Economic Co-operation and Development (OECD) countries. Since 1986, when the systematic measurements of these transfers became available, OECD countries have, on average, supported their farmers with US$ 300 billion annually (OECD 2001). Recent efforts to reduce the level of support and protection are acknowledged (see also Chapters 8 and 9) as are all policy reforms that have 2

In India, for example, internal rates of return on agricultural research investments during the Green Revolution were well above 50 per cent (Pal and Byerlee 2006).

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helped to make these policies less trade-distorting. But it must also be recognised that these measures have done considerable damage in the past; high protection in OECD countries made it difficult for developing countries to sell their produce abroad, and OECD export subsidies even made their agriculture uncompetitive at home. Lower prices at home held back investments in agriculture, discouraged production and made developing countries increasingly dependent on food imports.

3.

Long-term perspectives of climate change impacts

There is growing evidence that climate change will be associated with both a change in the average long-term growing conditions and a change in short-term weather variability. As happened during the recent episode of high and volatile prices, climate and weather will lead to shifts in food supply and prices as well as the possibility of more frequent and more severe swings. Shifts and swings in supply and prices will ultimately affect all four dimensions of food security, i.e. availability, access, stability and utilisation. In addition, climate change will affect the global food system indirectly by altering growth and distribution of incomes, and thus demand for agricultural produce. These indirect, income-related effects are particularly important for future food security as they alter the overall economic conditions that determine the purchasing power of consumers and therefore their access to food.

Climate change scenarios Different combinations of possible trajectories have been organised by the Intergovernmental Panel on Climate Change (IPCC) into the so-called Special Report on Emissions Scenarios (SRES); they capture, inter alia, various economic growth and equity trajectories, and thereby the main variables that determine access to food. There are four families of socioeconomic development and associated emission scenarios, known as SRES A2, B2, A1 and B1. The main assumptions of these scenarios are summarised in Table 6.1. SRES A1, for example, represents a future world of very rapid economic growth, low population growth and the rapid introduction of new and more efficient technology. The A1 scenario family further develops into scenario groups that describe alternative directions in the energy system. Importantly for agriculture and world food supply, SRES A2 assumes the highest projected population growth of the four scenarios and is thus associated with the highest food demand (IPCC 2007).

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Table 6.1. Characteristics of Special Report on Emissions Scenarios (SRES) scenarios

A1 storyline World: Marketoriented Economy: Fastest per capita growth Population: 2050 peak, then decline Governance: strong regional interactions; income convergence Technology: Three scenario groups: A1FI fossil intensive A1T non-fossil energy sources A1B balanced across all sources

A2 storyline World: Differentiated Economy: Regionally oriented, lowest per capita growth Population: Continuously increasing Governance: Self-reliance with preservation of local identities Technology: Slowest and most fragmented development

B1 storyline World: Convergent Economy: Service and information based, lower growth than A1 Population: Same as A1 Governance: Global solutions to economic, social and environmental sustainability Technology: Clean and resource-efficient

B2 storyline World: Local solutions Economy: Intermediate growth Population: Continuously increasing, but at lower rate than A2 Governance: Local and regional solutions to environmental protection and social equity Technology: More rapid than A2, less rapid and more diverse than A1 and B1

← Environmental emphasis Source: IPCC 2007.

Regional emphasis →

Global integration →

Economic emphasis →

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Among the various SRES scenarios, A1FI represents (closely followed by SRES A2) the most carbon-intensive development trajectory: it assumes the highest emissions of carbon dioxide (CO2) and thus the highest atmospheric concentration of greenhouse gas (GHG) emissions (i.e. over 900 ppm by 2100). The B1 storyline, on the other hand, is associated with the lowest emission levels and thus the lowest GHG concentration with a stabilisation at just over 500 ppm towards the end of the twenty-first century (IPCC 2007). The assumptions and outcomes of the various SRES scenarios directly affect future agriculture and food security: changes in the agro-ecological growing conditions affect production and productivity in agriculture and thereby the availability of food. Changes in the overall socioeconomic conditions and the contribution of agriculture to income generation affect access to food. Food security will be mainly affected by changes in levels and distribution of incomes (access) and indirectly through food production (availability) and levels and efficiency of agricultural production (income effects through agriculture). The next section carefully scrutinises the impact of climate change scenarios on the four dimensions of food security.

How will climate change affect the four dimensions of food security? Dimension 1: food availability Depending on the SRES emission scenario and climate models considered, global mean surface temperature is projected to rise between 1.8 degrees Celsius (°C) (with a range from 1.1 to 2.9°C for SRES B1) to 4.0°C (with a range from 2.4 to 6.4°C for A1) by 2100 (IPCC 2007). Changes in temperature and atmospheric CO2 concentration as well as the amounts and the distribution of precipitation will fundamentally affect future agro-ecological growing conditions and thus the overall agricultural output. They will also determine the distribution of output over geographical regions and different latitudes, and the composition and geographical allocation of crops and types of livestock. Depending on the agricultural activity and the geographical location, the effects of climate change can be both positive and negative. In temperate latitudes, for instance, higher temperatures are expected to be predominantly beneficial to agriculture: the areas potentially suitable for cropping will expand, the length of the growing period will increase and crop yields may rise. A moderate incremental warming (1–2°C) in some humid and

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temperate grassland areas may increase pasture productivity. On the other hand, the projected increase in the frequency of extreme events, such as heat waves and droughts, in the Mediterranean region or increased heavy precipitation events and flooding in temperate regions could substantially lower production and productivity (Rosenzweig et al. 2002). Likewise, semiarid and arid pastures are expected to experience a decline in productivity, which will lead to reduced livestock productivity and increased livestock mortality. In drier areas, climate models predict increased evapo-transpiration and lower soil moisture levels (IPCC 2007). As a result, some cultivated areas may become unsuitable for cropping and some tropical grassland may become increasingly arid. Temperature increases will also extend the range of many agricultural pests. In addition, higher temperatures may increase the ability of pest populations to survive the winter season and then to attack new crops in spring. The projected increase in atmospheric CO2 concentrations represents another important change in global agro-ecological growing conditions. Depending on the SRES emission scenario, the atmospheric CO2 concentration is projected to increase from about 385 ppm today to over 500 ppm by 2100 in SRES B1; or to over 900 ppm in SRES A1FI (IPCC 2007). Higher CO2 concentrations will have a positive effect on many crops, enhancing biomass accumulation and final yield. However, the magnitude of this effect is less clear, with important differences depending on management (e.g. irrigation and fertilisation regimes) and crop type (IPCC 2001). In experiments, the yield response to elevated CO2 (550 ppm) shows that under optimal growing conditions, yields increase by 10–20 per cent for C3 crops (such as wheat, rice and soybeans), and only 0–10 per cent for C4 crops, such as maize and sorghum (IPCC 2007).3 In addition, the nutritional quality of agricultural produce may not increase in line with higher yields. In experimental set-ups, some cereal and forage crops, for example, show lower protein concentrations under elevated CO2 conditions. Finally, a number of recent studies have estimated the impact of climate change on likely changes in land suitability (e.g. Fischer et al. 2002; Tubiello and Fischer 2007). These studies are in essence based on the FAO/International Institute for Applied Systems Analysis (IIASA) Agro-ecological Zones (AEZ) methodology, and estimates implicitly include adaptation using available management techniques and crops, but excluding new cultivars from breeding or biotechnology. Study results suggest that total land and total prime land would remain 3

C3 and C4 refer to mechanisms of plants to fix carbon dioxide in photosynthesis.

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virtually unchanged at the current levels of 2,600 and 2,000 million ha, respectively. However, there will be more pronounced regional shifts, with a considerable increase in suitable cropland at higher latitudes (developed countries, + 160 million ha) and a corresponding decline of potential cropland at lower latitudes (developing countries, –110 million ha). This predicted net decline of 110 million ha for the developing countries is the result of a massive predicted decrease in agricultural prime land of about 135 million ha, which is offset by an increase in moderately suitable land of over 20 million ha. An even more pronounced shift in the quality of cropland is predicted in developing countries, which is also reflected in the shift in land suitable for multiple cropping. In sub-Saharan Africa alone, land for double cropping would decline by 10–20 million ha, and land suitable for triple cropping would decline by 5–10 million ha. At a regional level, the biggest losses in suitable cropland are likely to be in Africa, whereas the largest expansion of suitable cropland would be in the Russian Federation and in Central Asia (Fischer et al. 2002).

Dimension 2: food stability Global and regional weather conditions are also expected to become more variable, with increases in the frequency and severity of extreme events such as cyclones, floods, hailstorms and droughts (IPCC 2007; Elsner et al. 2008). This may bring greater fluctuations in crop yields and increase the risks of landslides and erosion damage. As a consequence, the stability of food supplies would decline. Neither climate change nor short-term climate variability, and associated adaptation, are new phenomena in agriculture. For example, important agricultural areas of the world, such as the Midwest of the United States, north-eastern Argentina, southern Africa, or south-eastern Australia, traditionally have experienced higher climate variability than other regions in the world, such as central Africa or Europe (Fischer et al. 2002). What is new, however, is that the areas subject to high climate variability are likely to expand, while the extent of short-term climate variability is likely to increase across all regions. Furthermore, the rates and levels of projected warming may exceed historical records in some regions. If climate fluctuations become more pronounced and more widespread, droughts and floods – the dominant causes of short-term fluctuations in food production in semiarid and sub-humid areas – will become more severe and frequent. In semiarid areas, droughts can dramatically reduce

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crop yields as well as numbers and productivity of livestock (IPCC 2001). Again, most of this land is in sub-Saharan Africa and parts of South Asia, implying that the poorest regions with the highest level of chronic undernourishment will also be exposed to the greatest instability in food production (Bruinsma 2003). How strongly these impacts will be felt will crucially depend on whether such fluctuations can be countered by investments in farm management, irrigation, better storage facilities, improved information provision, alternative employment options, more appropriate policy environments or more food imports. In addition, a policy environment that fosters reduction in barriers to free trade and promotes investments in transportation, communications and irrigation infrastructure may help address these challenges early on.

Dimension 3: utilisation Climate change will affect the ability of individuals to utilise food effectively by altering conditions for ensuring food safety and by changing the pressure from vector-, water- and food-borne diseases. The IPCC (2007) report examines how the various forms of diseases, including vectorborne diseases such as malaria, are likely to spread or recede in response to climate change. We discuss below the impact on diseases that affect food safety directly, i.e. food- and water-borne diseases. The main concern about climate change and food security is that changing climatic conditions can initiate a vicious circle in which an infectious disease causes (or compounds) hunger, which in turn makes the affected populations more susceptible to infectious diseases. The result can be a substantial decline in labour productivity, an increase in poverty and even an increase in mortality. Essentially every manifestation of climate change, be it drought, higher temperatures or heavy rainfalls, has an impact on disease pressure and there is growing evidence that these changes affect food safety and food security (IPCC 2007). The IPCC (2007) report also emphasises that increases in daily temperatures will raise the incidence of food poisoning, particularly in temperate regions. Warmer seas may contribute to increased cases of poisoning in humans who eat shellfish and reef-fish (ciguatera) in tropical regions and expansion of the disease towards the poles (Hall et al. 2002; Hunter 2003). However, there is little new evidence that climate change significantly alters the prevalence of these diseases. Several studies have confirmed and quantified the effects of temperature on common forms of food poisoning, such as salmonellosis (D’Souza et al. 2004;

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Kovats et al. 2004). These studies show an approximately linear increase in reported cases for each degree increase in weekly temperature. Moreover, there is evidence that temperature variability affects the incidence of diarrhoeal disease. A number of studies found that rising temperatures were strongly associated with increased numbers of episodes of diarrhoeal disease in adults and children. These findings have been corroborated by analyses based on monthly temperature observations (e.g. Checkley et al. 2000). Extreme rainfall events can increase the risk of outbreaks of water-borne diseases, particularly where traditional water management systems are insufficient to handle new extremes (IPCC 2007). Likewise, the impacts of flooding will be felt most strongly in environmentally degraded areas, and where basic public infrastructure, including sanitation and hygiene, is lacking. This will raise the number of people exposed to water-borne diseases (e.g. cholera) and thus lower their capacity to effectively utilise food (Speelmon et al. 2000).

Dimension 4: access to food Access to food is closely linked to the power of individuals to purchase food and the evolution of real incomes and food prices. Although the various SRES scenarios differ with regard to population and policy assumptions, essentially all SRES development paths describe a world of robust economic growth and rapidly shrinking importance of agriculture in the long run and thus assume a continuation of a trend that has been under way for decades in many developing regions. It is a world where income growth will allow the largest part of the world’s population to address possible shortfalls in local food production through imports and, at the same time, find ways to cope with safety and stability issues of food supplies (Fischer et al. 2002). It is also a world where real incomes rise more rapidly than real food prices, which suggests that the share of income spent on food should decline. In this case, even high food prices are unlikely to create a major dent in the food expenditures. However, not all parts of the world perform equally well in the various development paths and not all development paths are equally benign for growth. Where income levels are low and shares of food expenditures are high, higher prices for food may still create or exacerbate a possible food security problem. A number of studies have attempted to measure the likely impacts of climate change on food prices (e.g. Fischer et al. 2002; Tubiello et al. 2007). The basic messages that emerge from these studies are:

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50 Fischer et al.

Food price increases in %

40 30

Parry et al.

20 10 Darwin

0

Reilly et al.

–10 –20 –30 1

2 3 4 Temperature increase in degrees Celsius

5

Figure 6.4. Relationship between food prices and temperature increases, according to different studies Source: adapted from IPCC 2007 using data from Fischer et al. 2002; Parry et al. 1999, 2004, Darwin, 2004 and Reilly et al. 1994.

(a) On average, prices for food are expected to rise moderately in line with moderate increases in temperature (until 2050); some studies even foresee a small decline in real prices until 2050 (see Figure 6.4). (b) After 2050, and with further increases in temperatures, prices are expected to increase more substantially. In some studies and for some commodities (rice and sugar), prices are forecast to increase by as much as 80 per cent above their reference levels in the absence of climate change (IPCC 1995). (c) Price changes expected to result from the effects of global warming are, on average, much smaller than price changes resulting from different socioeconomic development paths. For instance, the SRES A2 scenario would imply an increase in real cereal prices of about 170 per cent. The (additional) price increase as a result of climate change (in the HadCM3 climate change case4) would only be 14.4 per cent. Overall, this appears to be the sharpest price increase reported, and it is not surprising that this scenario would imply a stubbornly high number of undernourished people until 2080. However, a constant absolute number of undernourished people would still imply a sharp 4

For an explanation see: http://www.cccsn.ca/Help_and_Contact/Which_Scenario-e.html

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decline in the prevalence of hunger. This is because given the high population assumed in the SRES A2 world (13.6 billion people globally and more than 11.6 billion in the developing world), this would imply a particularly sharp drop in the prevalence of undernourished people from 17 per cent now to about 7 per cent by 2080.

Quantifying the impact of climate change on food security A number of studies have recently quantified the impacts of climate change on food security (e.g. Parry et al. 1999; Jones and Thornton 2003; Parry et al. 2004; Shah et al. 2008). In terms of quantifying projections of change in agronomic yield, these studies are either based on the AEZ tools, developed by the IIASA, or the Decision Support System for Agro-technology Transfer (DSSAT) suite of crop models; all use the IIASA-Basic Linked System (BLS) economic model for assessing economic impacts. These tools, with some modifications relating to how changes in crop yield are simulated, have also been employed by others to undertake similar assessments and provide sensitivity analyses across a range of SRES and General Circulation Model (GCM) projections. The main results of these studies have been discussed in various publications (e.g. Schmidhuber and Tubiello 2007). The key messages can be summarised as follows: First, it is very likely that climate change will increase the number of people at risk of hunger compared with reference scenarios with no climate change; the exact impacts however will depend strongly on the projected socioeconomic developments (Table 6.2). For instance, it is estimated that climate change would increase the number of undernourished people in 2080 by between 5 and 26 per cent, compared with no climate change, or by between 5–10 million (B1 SRES) and 120–170 million people (A2 SRES), with withinSRES ranges depending on GCM climate projections (Fischer et al. 2005). Second, it is likely that the magnitude of these climate impacts will be small in comparison with the impact of socioeconomic development. As is evident from the table, and within the limitations of socioeconomic forecasts, these studies suggest that high economic growth and a decline in population growth projected for the twenty-first century will, in all but one scenario (SRES A2), significantly reduce the number of people at risk of hunger in 2080. At any rate, the prevalence of undernourishment will decline as all scenarios assume that world population will continue to grow until 2080, albeit at declining rates. By contrast to the FAO estimates of 820 million undernourished people in developing countries in

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Table 6.2. Projected impact of climate change scenarios on the number of undernourished people in developing countries, 2020, 2050 and 2080 Year 2020 AEZScenario BLS

DSSATBLS

Year 2050 AEZBLS

DSSATBLS

Year 2080 AEZBLS

DSSATBLS

No. of people at risk of hunger (in millions) A1 A2 B1 B2

663 782 749 630

663 782 749 630

A1 A2 B1 B2

666 777 739 640

687 805 771 660

A1 A2 B1 B2

NA 794 NA 652

726 845 792 685

Reference (no climate change) 208 208 108 721 721 768 239 240 91 348 348 233 Climate change (CO2) 219 210 730 722 242 242 336 358

136 885 99 244

Climate change (no CO2) NA 308 NA 788 933 950 NA 275 NA 356 415 257

108 769 90 233 136 742 102 221 370 1,320 125 384

Note: Studies are either based on the Agro-ecological Zones (AEZ) tools or the Decision Support System for Agro-technology Transfer (DSSAT). All models use the IIASA – Basic Linked System (BLS) economic model to assess the impact of different climate change scenarios. Source: Schmidhuber and Tubiello 2007.

the base period,5 several studies (Fisher et al. 2002; Parry et al. 2004; Parry et al. 2005) estimate reductions of over 75 per cent by 2080, or about 560–700 million people, projecting that there will be 100–240 million undernourished people by 2080 (A1, B1, and B2). As mentioned above, the only exception is SRES scenario A2, where the number of people going hungry is forecast to decrease only slightly up to 2080; but the higher population growth rates in A2 compared to other scenarios 5

The latest estimates suggest that the number of undernourished people reached 923 million in 2007 (FAO 2008a).

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mean that here too the prevalence of undernourishment will decline drastically. Third, sub-Saharan Africa is likely to surpass Asia as the most foodinsecure region (Davidson et al. 2003; IPCC 2007). However, this is largely independent of climate change and is mostly the result of the socioeconomic development paths assumed for the different developing regions in the SRES scenarios. In most SRES and climate change scenarios, 40–50 per cent of the hungry people worldwide would be in sub-Saharan Africa by 2080, compared with about 24 per cent today (Fischer et al. 2002). In some simulations the figure for undernourished people in sub-Saharan Africa is even higher at 70–75 per cent of global undernourishment by 2080. These high estimates have emerged in the slower growth variants of the A2 and B2 scenarios (Tubiello et al. 2007); also an A2 scenario with slower population growth results in a higher concentration of hunger in sub-Saharan Africa. For regions other than sub-Saharan Africa, results are highly dependent on GCM scenarios and are therefore highly uncertain. Fourth, although there is significant uncertainty as to the effects of elevated CO2 on crop yields, there is much less uncertainty about food security. This result emerges from a comparison of climate change simulations with and without CO2 fertilisation effects on crop yields. As can be seen from Table 2, higher CO2 fertilisation would not greatly affect global projections of hunger. Because essentially all SRES worlds are characterised by much higher real incomes, much improved transportation and communication options as well as still sufficient global food production, the small reduction in supplies will not be able to make a dent in global food security outcomes (Tubiello et al. 2007). Many studies (e.g. Parry et al. 2004; Fischer et al. 2005) find that climate change without CO2 fertilisation would reduce the number of undernourished people by 2080 only by some 20–140 million (120 to 380 million for SRES A1, B1 and B2 without CO2 fertilisation effect, compared to 100–240 million with CO2 fertilisation effect). The exception in these studies is again SRES A2, under which the assumption of no CO2 fertilisation results in a projected range of 950–1300 million people undernourished in 2080, compared with 740–850 million projected under climate change, but with CO2 effects on crops. Fifth, recent research suggests large positive effects of climate stabilisation for the agricultural sector. However, as the stabilising effects of mitigation measures can take several decades to take effect, the benefits for crop production may be realised only in the second half of this century (Arnell et al. 2002). Importantly, even in the presence of robust global long-term benefits, current tools can only project highly uncertain

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regional and temporal patterns of winners and losers, and they depend critically on the underlying GCM projections (Tubiello et al. 2007). Finally, in addition to the socioeconomic pressures already considered within the framework of the SRES scenarios, the prospect of lasting high energy prices and a diversion of agricultural resources into energy production could significantly understate future food security problems. Studies addressing the possible consequences of such a situation on world food supply have only just started to become available. From a long-term perspective of commercial agriculture, high food prices could provide the agricultural sector with the long-hoped-for basis for improved economic profitability (Schmidhuber 2006). Yet, from a short-term perspective of subsistence agriculture, a high-energy-/high-food-price scenario could further undermine food security. Moreover, higher food and energy prices could also pose additional food security problems for the landless rural poor as well as for urban dwellers (von Braun 2008). Subsistence producers face higher input prices without producing a marketable surplus that would earn them higher revenues. Urban dwellers have to cope with price surges on several fronts – not only for food but also for fuel, electricity, transport, and many other basic necessities (Diouf and Schmidhuber 2008). These changes suggest a further increase in food insecurity over the short and medium term. Importantly, none of the major world food models that have examined the links between climate change and food security have yet fully incorporated these new food–energy price links and the resulting competition for resources. A few notes of caution on interpreting these projections are in order at this juncture. First, the results presented can only be interpreted as probability-based forecasts on a range of possible outcomes. The reason for this is that the SRES scenarios, like all scenarios, are not able to project future changes in economic activity, emissions and climate accurately. Second, existing global assessments of climate change and food security have only been able to focus on the impacts on food availability and access to food, without quantification of the potentially important effects of climate change on food utilisation and stability. This means that these assessments neither include potential problems arising from additional impacts as a result of extreme events such as drought and floods, nor do they quantify the potential impacts of changes in the prevalence of food-borne diseases. Third, it is important to note that even in terms of food availability, all current assessments of world food supply have focused on the impacts of mean climate change, that is, they have not considered the possibility of

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significant shifts in the frequency of extreme events on regional production potential, nor have they considered scenarios of abrupt climate or socioeconomic change; any of these scenario variants is likely to increase the already negative projected impacts of climate change on world food supply. Fourth, recent global assessments of climate change and food security rest essentially on a single modelling framework, namely the IIASA system, which combines the FAO/IIASA AEZ model with various GCM models, and the IIASA BLS system or close variants of the IIASA system (Rosenzweig and Parry 1994). This has important implications for uncertainty, given that the robustness of all these assessments strongly depends on the performance of the underlying models. Fifth, the recent surge in energy prices could have a more substantial and more immediate impact on economic development and food security than is captured by any of the SRES scenarios. Finally, we note that assessments that not only provide scenarios but also attach probabilities of particular outcomes coming true could provide an important element in improved or, at least, better informed policy decisions. These would also help to justify and prioritise policy measures to adapt to or mitigate the impacts of climate change on food security.

4.

Conclusion

The objective of this chapter was to examine the main factors behind the 2007–2008 food crisis and to put the effects of weather variability and climate change into the context of the overall change in food prices. In explaining the causes of the crisis, we differentiated between long- and short-term trends and between demand and supply factors. Without gauging the effects of individual factors precisely, we found that the rapidly rising demand for biofuel feedstocks was a key driver for the sharp price increase. Also important were the restrictions on supply through export quotas and taxes. We also showed that other, frequently quoted, factors had little or no effect on food prices. For instance, the widely held claim that import demand from India and China was at the heart of the rapid and massive increases in cereal prices could not be substantiated. In analysing the role of weather and climate in changes in production and prices we found that weather patterns had indeed had an impact on output of some crops. A case in point is that of the droughtrelated local swings in wheat production, which, compounded by other factors unrelated to the weather, were strong enough to affect the global

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wheat markets. We could not, however, substantiate claims that climaterelated global weather changes are already affecting overall agricultural production in a negative way. The growth in total cereal production even suggests a positive impact of climate and weather changes. The impacts of climate and weather witnessed during the 2007–2008 food crisis could be a harbinger of future threats to and opportunities for global agriculture and food security under climate change. Moderate warming will shift the areas suitable for crop production to higher latitudes and raise production potentials in these areas; but it will also reduce the overall area of crop land suitable for agricultural production and diminish crop yield potentials in areas at low latitudes. Hardest hit by these shifts will be many of the developing countries already facing food insecurity, which could see a further loss of domestic production potentials but may not have the resources to import sufficient food to offset shortfalls in domestic production. In addition, the overall resilience of the global food system (food stability) could be compromised as the severity and frequency of extreme weather events increase. Again, this will most adversely affect those countries which are least equipped to adapt to the deteriorating production conditions. Finally, the discussion illustrated that adaptation and mitigation strategies can play an important role in ensuring food security under climate change. For instance, increased investments in agricultural research and development and rural extension are essential to develop and spread crops that are more resistant to weather extremes; also important are strategies that enable a growing number of farmers to use water harvesting or soil conservation techniques. The benefits of these production-focused strategies should be supplemented with measures that help improve access to food and the overall resilience of food systems. Lower trade barriers could help countries to cope with temporary food deficits. But the experience from the 2007–2008 food crisis also suggests that the withholding of supplies through export taxes and restrictions can be particularly detrimental to global food security. More stringent disciplines on these measures should therefore become a priority in future trade negotiations.

References Arnell, N. W., Cannell, M. G. R., Hulme, M., Kovats, R. S., Mitchell, J. F. B., Nicholls, R. J., Parry, M. L., Livermore, M. T. J. and White, A. 2002. ‘The Consequences of CO2 Stabilisation for the Impacts of Climate Change’, Climatic Change 53: 413–46.

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Bruinsma J. (ed.) 2003. World Agriculture: Towards 2015/2030. An FAO Perspective. London: Earthscan. Checkley, W., Epstein, L. D., Gilman, R. H., Figueroa, D., Cama, R. I., Patz, J. A., and Black, R. E. (2000). ‘Effects of EI Niño and Ambient Temperature on Hospital Admissions for Diarrhoeal Diseases in Peruvian Children’, The Lancet 4355: 442–50. Darwin, R. 2004. ‘Effects of Greenhouse Gas Emissions on World Agriculture, Food Consumption, and Economic Welfare’. Climatic Change 66: 191–238. Davidson, O., Halsnæs, K., Huq, S., Kok, M., Metz, B., Sokona, Y. and Verhagen, J. 2003. ‘The Development and Climate Nexus: The case of Sub-Saharan Africa’, Climate Policy 3: S97–S113. Diouf, J. and Schmidhuber, J. (2008) ‘High Food Prices: Causes and Possible Actions’, UN Affairs, October. D’Souza, R. M., Becker, N. G., Hall, G. and Moodie, K. B. 2004. ‘Does Ambient Temperature Affect Foodborne Disease?’ Epidemiology 15: 86–92. Elsner, J. B., Kossin, J. P. and Jagger, T. H. 2008. ‘The Increasing Intensity of the Strongest Tropical Cyclones’, Nature 455: 92–95. Evenson, R. E. and Gollin D. 2003. ‘Assessing the Impact of the Green Revolution, 1960 to 2000’, Science 300: 758–62. FAO (Food and Agriculture Organization of the United Nations) 2002. The State of Food Insecurity in the World 2001. Rome: FAO. ——2008a. Soaring Food Prices: Facts, Perspectives, Impacts and Actions Required, paper prepared for the High-Level Conference on World Food Security: The Challenges of Climate Change and Bioenergy (www.fao.org/foodclimate/ hlc-home/en/). ——2008b. State of Agricultural Commodity Markets 2008. Rome: FAO. ——2008c. ‘Policy Measures Taken by Governments to Reduce the Impact of Soaring Prices’, Crop Prospects and Food Situation 3: 13–17. Fischer, G., Shah, M., and van Velthuizen, H. 2002. Climate Change and Agricultural Vulnerability, special report prepared by the International Institute for Applied Systems Analysis for the World Summit on Sustainable Development (www.un.org/events/wssd/). Fischer, G., Shah, M., Tubiello, F. N. and van Velthuizen, H. 2005. ‘Socioeconomic and Climate Change Impacts on Agriculture: An Integrated Assessment, 1990–2080’, Philosophical Transactions of the Royal Society 360: 2067–83. Hall, G. V., D’Souza, R. M. and Kirk, M. D. 2002. ‘Foodborne Disease in the New Millennium: Out of the Frying Pan and into the Fire?’ The Medical Journal of Australia 177: 614–18. Hunter, P. R. 2003. ‘Climate Change and Waterborne and Vector-borne Disease’, Journal of Applied Microbiology (Supplement 1) 94: 37–46. IMF (International Monetary Fund) 2006. World Economic Outlook 2006: The Boom in Commodity Prices: Can it Last? Washington, DC: IMF.

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IPCC (Intergovernmental Panel on Climate Change) (ed.) 1995. Intergovernmental Panel on Climate Change, Climate Change 1995: Impacts, Adaptations and Mitigation of Climate Change: Scientific–Technical Analysis. Cambridge University Press. IPCC (Intergovernmental Panel on Climate Change) (ed.) 2001. Climate Change: Impacts, Adaptation and Vulnerability. Contribution of the Working Group II to the Third Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. IPCC (Intergovernmental Panel on Climate Change) (ed.) 2007. Climate Change: Impacts, Adaptation and Vulnerability. Contribution of the Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. Jones, P. G. and Thornton, P. K. 2003. ‘The Potential Impacts of Climate Change on Maize Production in Africa and Latin America in 2055’, Global Environmental Change 13: 51–59. Kovats R. S., Edwards, S. J., Hajat, S., Armstrong, B. G., Ebi, K. L., Menne, B., the Collaborating Group 2004. ‘The Effect of Temperature on Food Poisoning: A Time-series Analysis of Salmonellosis in Ten European Countries’, Epidemiology and Infection 132: 443–53. OECD (Organisation for Economic Co-operation and Development) 2001. ‘Towards More Liberal Agricultural Trade’, OECD Observer Policy Brief November. ——2008. International development statistics online. Paris: OECD (www.oecd.org/ statisticsdata/0,3381, en_2649_34485_1_119656_1_1_1,00.html). OECD–FAO (Organisation for Economic Co-operation and Development/Food and Agriculture Organization of the United Nations) 2008. OECD–FAO Agricultural Outlook 2008–2017. Paris: OECD and Rome: FAO. Pal, S. and Byerlee, D. 2006. ‘The Funding and Organization of Agricultural Research in India: Evolution and Emerging Policy Issues’, in Pardey, P. G., Alston, J. M., and Piggott, R. R. (eds.), Agricultural R&D Policy in the Developing World: Too Little? Too Late? Washington, DC: International Food Policy Research Institute. Parry, M., Rosenzweig, C., Iglesias, A., Fischer, G. and Livermore, M. 1999. ‘Climate Change and World Food Security: A New Assessment’, Global Environmental Change 9: S51–S67. Parry, M. L., Rosenzweig, C., Iglesias, A., Livermore, M. and Fischer, G. 2004. ‘Effects of Climate Change on Global Food Production under SRES Emissions and Socioeconomic Scenarios’, Global Environmental Change 14: 53–67. Parry, M. L., Rosenzweig, C. and Livermore, M. 2005. ‘Climate Change, Global Food Supply and Risk of Hunger’, Philosophical Transactions of the Royal Society 360: 2125–38.

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Reilly, J., Hohmann, N. and Kanes, S. 1994. ‘Climate Change and Agricultural Trade’, Global Environmental Change 4: 24–36. Rosenzweig, C. and Parry, M. L. 1994. ‘Potential Impact of Climate Change on World Food Supply’, Nature 367: 133–38. Rosenzweig, C., Tubiello, F. N., Goldberg, R., Mills E. and Bloomfield, J. 2002. ‘Increased Crop Damage in the US from Excess Precipitation under Climate Change’, Global Environmental Change 12: 197–202. Schmidhuber, J. 2006. ‘Impact of an Increased Biomass Use on Agricultural Markets, Prices and Food Security: A Longer-term Perspective’, paper presented at the International Symposium of Notre Europe. Schmidhuber, J. and Tubiello, F. N. 2007. ‘Climate Change and Global Food Security: Socioeconomic Dimensions of Vulnerability’, Proceedings of the National Academy of Sciences, 104: 19703–08. Schmidhuber, J. and Müller, A. (Forthcoming). ‘Climate Change, Food Security, and Future Conflict’, Technology. Shah, M., Fischer, G. and van Velthuizen, H. 2008. ‘Food Security and Sustainable Agriculture: The Challenges of Climate Change in Sub-Saharan Africa’, paper presented at the Commission on Sustainable Development, United Nations, New York. Speelmon, E. C., Checkley, W., Gilman, R. H., Patz, J., Calderon, M. and Manga, S. 2000. ‘Cholera Incidence and El Niño–related Higher Ambient Temperature’, Journal of the American Medical Association 283: 3072–74. Tubiello, F. N. and Fischer, G. 2007. ‘Reducing Climate Change Impacts on agriculture: Global and regional effects of mitigation, 2000–2080’, Technological Forecasting and Social Change 74: 1030–56. Tubiello, F. N., Amthor, J. S., Boote, K. J., Donatelli, M., Easterling, W., Fischer, G., Gifford, R. M., Howden, M., Reilly, J. and Rosenzweig, C. 2007. ‘Crop Response to Elevated CO 2 and World Food Supply: A Comment on “Food for Thought …” by Long et al., Science 312:1918–1921, 2006’, European Journal of Agronomy 26: 215–23. von Braun, J. 2007. The World Food Situation. New Driving Forces and Required Actions. Washington, DC: International Food Policy Research Institute. ——2008. ‘High and Rising Food Prices. Why are They Rising, Who is Affected, How are they Affected, and What should be Done?’ Paper presented at a US Agency for International Development (USAID) conference on Addressing the Challenges of a Changing World Food Situation: Preventing Crisis and Leveraging Opportunity.

PART 2 Trade and law: WTO and beyond

7 Agricultural policies: past, present and prospective under Doha kym anderson*

Every decade or two, food becomes newsworthy globally. Mostly this is because of an international price spike, either upwards (hurting consumers, as in 1973 and 2008) or downwards (hurting farmers in open economies, as in 1986). And most such price spikes in global food markets are a consequence of major national policy shifts, since local (often weather-induced) supply shocks in a multi-country trading world tend to offset each other. In 1986, for example, it was the food export subsidy war between western Europe and North America that drove real international food prices down to their lowest level since 1930 (Figure 7.1). The price hikes of 1973 and 2008, by contrast, were partly a consequence of a unilateral policy decision by a single large player: in 1973, the Soviet Union departed from its policy of self-reliance and entered the international grain market in a significant way to offset a domestic shortfall, and in 2007–2008 the United States and European Union decided to subsidise biofuel production and set mandates and targets for its use domestically. In both 1973 and 2008, other governments imposed export restrictions to insulate their consumers somewhat against the price rise, which pushed international prices even higher and drove more exporting countries to follow suit. Policy thus contributes to market volatility. This in turn is bad for growth, since volatility around the long-term trend in terms * Kym Anderson, George Gollin Professor of Economics, University of Adelaide, Australia. Financial assistance from IIT and World Bank Trust Funds, particularly by the governments of the Netherlands (BNPP) and the United Kingdom (DfID), is gratefully acknowledged, as are the contributions of the nearly 100 authors of the 75 country case studies and the Washington- and Adelaide-based teams, and of co-authors of recent papers including Johanna Croser, Peter Lloyd, Ernesto Valenzuela and Dominique van der Mensbrugghe. The views expressed are the author’s alone and not necessarily those of the World Bank or its Executive Directors.

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Figure 7.1. Real international food price index, 1900 to 2008 (1977–1979 = 100) a The deflator used is the price of manufactured exports to developing countries from the five largest high-income countries (France, Germany, Japan, the United Kingdom and the United States). Source: Author’s compilation using data from Pfaffenzeller, Newbolt and Rayner (2007), updated from 2004 with data from www.worldbank.org/prospects

of trade slows economic growth (Williamson 2008). Yet trade policy measures are very blunt instruments for dealing with volatility (especially in the modern era of myriad financial instruments for risk management), and their beggar-thy-neighbour feature diminishes the contribution of trade openness to the international public good. What is less newsworthy for the mass media, but probably far more important in their effect on the growth and distribution of global welfare, are gradual policy developments in individual countries and their combined effects on other countries via the trend terms of trade in international markets.1 The disarray in world agricultural markets increased 1

Some of the more transformational policy developments happen quite quickly, such as the end of colonisation around 1960; the creation of the Common Agricultural Policy in Europe in 1962; the floating of exchange rates and associated liberalisation, deregulation, privatisation and democratisation in the mid-1980s; the opening of China from 1979; and the demise of the Soviet Union in 1991.

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from the 1950s to the mid-1980s, but in the two decades since then there have been reforms in both developing and high-income countries that collectively raised international food and agricultural prices by about one-eighth. The remaining distortions to agricultural incentives nonetheless are still huge: they were responsible for as much as 60 per cent of the global welfare cost of all distortions to goods trade in 2004, even though agriculture accounts for only 3 and 6 per cent of global gross domestic product (GDP) and trade, respectively. These policy-imposed distortions not only affect economic growth, but also income inequality and poverty, given that three-quarters of the world’s poorest households depend on agriculture for their livelihood. This chapter summarises some new empirical findings from a World Bank research project that helps to illuminate what is behind the numbers cited above. That evidence shows the extent to which policy interventions added to the disarray in world agricultural markets from the 1950s to the 1980s, as well as the extent of the gradual progress in reform since then. It also includes some economy-wide modelling results that show how far that reform had progressed by 2004 compared with what was still needed before agricultural markets would be free of distortions. The chapter then concludes with an assessment of how the World Trade Organization (WTO) could help complete that reform process in the context of the high world food prices of 2008.

Worsening disarray until the 1980s, but then some reforms Huge progress has been made in reducing rates of protection offered to import-competing manufacturers in high-income countries since the late 1940s when the General Agreement on Tariffs and Trade (GATT) came into being. Commitments were made by GATT Contracting Parties to lower tariffs and phase out non-tariff barriers progressively following each round of GATT negotiations, such that by the new millennium the average rate of manufacturing protection was less than 2 per cent in Organisation for Economic Co-operation and Development (OECD) countries. By contrast, manufacturing protection was introduced by many newly independent developing countries from around 1960, encouraged by Prebish (1950) and Singer (1950) in what became known as import-substituting industrialisation, and this was accompanied by multiple exchange rates that led to currencies being highly overvalued. Both measures were tradereducing, and both indirectly harmed the agricultural sectors of developing countries. Farmers in many developing countries were also harmed

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directly by taxes on agricultural exports either explicitly or implicitly through state-owned processing and trading enterprises that paid farmers low prices for their primary products. To measure the impact of those interventions and subsequent policy developments on farmers’ incentives, a recent World Bank research project (see www.worldbank.org/agdistortions) developed a series of indicators. Before presenting the results, these indicators need to be described briefly.

Key indicators of distortions to agricultural incentives The most basic measure, the nominal rate of assistance (NRA), is the percentage by which government policies have raised gross returns to farmers above what they would be without the government’s intervention (or lowered them, if the NRA is negative). Similarly, a consumer tax equivalent (CTE) is calculated as the percentage by which policies have raised prices paid by consumers of agricultural outputs (with a negative value implying a subsidy to consumers). The NRA and CTE will be identical if the sole source of government intervention is a trade measure and the two are measured at the same point in the value chain. These two measures are similar to the OECD (2008) producer and consumer support estimates (PSE and CSE), but an important difference is that the NRA and CTE are expressed as a percentage of the undistorted (e.g. border) rather than the distorted price. Each farm industry is classified either as import-competing, as a producer of exportables, or as producing a nontradable (with its status sometimes changing over the years), so that it is possible to generate for each year the weighted average NRAs for the two different groups of tradables. Those NRAs are used to generate a trade bias index, TBI, defined as: ð1ÞTBI ¼ ð1 þ NRAagx =100Þ=ð1 þ NRAagm =100Þ  1

(1)

where NRAagm and NRAagx are the average percentage NRAs for the import-competing and exportables parts of the agricultural sector. The TBI indicates in a single number the extent to which the typically antitrade bias (negative TBI) in agricultural policies changes over time. Farmers are affected not just by the prices of their own outputs but also (albeit indirectly through changes to factor market prices and the exchange

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rate) by the incentives offered to nonagricultural producers. That is, it is relative prices and hence relative rates of government assistance that affect producers’ incentives. By generating estimates also of the average NRA for non-agricultural tradables, it is possible to calculate a Relative Rate of Assistance, RRA, defined in percentage terms as: ð2ÞRRA ¼ 100½ðþNRAagt =100Þ=ð1 þ NRAnonagt =100Þ  1

(2)

where NRAagt and NRAnonagt are the weighted average percentage NRAs for the tradable parts of the agricultural and non-agricultural sectors, respectively. Since the NRA cannot be less than −100 per cent if producers are to earn anything, neither can the RRA (assuming NRAnonagt is positive). And if both of those sectors are equally assisted, the RRA is zero. This measure is useful in that if it is below (above) zero, it provides an internationally comparable indication of the extent to which a country’s policy regime has an anti- (pro-) agricultural bias. Exchange-rate distortions generated by dual or multiple exchange-rate regimes are also considered when calculating NRAs and CTEs, following the methodology outlined in Anderson et al. (2008). These have been important in many developing countries, particularly during the 1970s and 1980s, making the absolute magnitude of their estimated (typically) positive NRAs for importables and (typically) negative NRAs for exportables larger than they otherwise would have been. To provide single indicators of distortions imposed by each country’s border and domestic agricultural policies on its economic welfare and its trade volume, Lloyd, Croser and Anderson (2009) define a Welfare Reduction Index (WRI) and a Trade Reduction Index (TRI) and estimate them for the 75 countries in the World Bank study, taking into account that the NRA differs from the CTE for some products (while ignoring indirect effects of sectoral and trade policy measures directed at non-agricultural sectors). The WRI measure reflects the true welfare cost of agricultural price-distorting policies better than the NRA and CTE because it takes into account the dispersion in distortions. That is, it captures the disproportionately higher welfare costs of peak levels of assistance or taxation.

Summary of estimates of distortions since the 1950s The study launched by the World Bank in 2006 involved 75 countries (including 20 high-income countries) that together account for 92 per cent

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40 30 20 10 0

1955–59 1960–64 1965–69 1970–74 1975–79 1980–84 1985–89 1990–94 1995–99 2000–04

–10 –20 –30 HIC & ECA

HIC & ECA, incl. decoupled payments Developing countries

Figure 7.2. Nominal rates of assistance to agriculture in high-income countries (HIC) and European transition economiesa and in developing countries, 1955 to 2004 (per cent, weighted averages, with ‘decoupled’ payments included in the dashed HIC line) a Denoted by the World Bank as ECA, for (Central and Eastern) Europe and Central Asia. Source: Anderson (2009, Ch. 1), based on estimates in Anderson and Valenzuela (2008).

of agricultural GDP. The global summary of these new results is provided in Figure 7.2. It reveals that the nominal rate of assistance to farmers in high-income countries rose steadily from the end of World War II until the end of the 1980s, apart from a small dip when international food prices spiked around 1973–1974. Since peaking at more than 50 per cent in the mid-1980s, that average NRA for high-income countries has fallen a little, depending on the extent to which one believes that some new farm programmes are ‘decoupled’ in the sense of no longer influencing production decisions. For developing countries, too, the average NRA for agriculture has been rising, but from a level of around −25 per cent during the period from the mid-1950s to the early 1980s to nearly 10 per cent in the first half of the present decade. Thus the global gross subsidy equivalent of those rates of assistance has risen very substantially in constant (2000) US dollar terms, from close to zero up to the mid-1970s to more than US$ 200 billion per year at the farm gate since the mid-1990s (Figure 7.3). When expressed on a per farmer basis, the gross subsidy equivalent (GSE) varies enormously between high-income and developing countries. From 1980–1984 the GSE in high-income countries was already

past, present and prospective policies under doha 173 300 200 100 0 –100 –200

1955–59 1960–64 1965–69 1970–74 1975–79 1980–84 1985–89 1990–94 1995–99 2000–04 2005–07

Developing countries (no averages for periods 1955–59 and 2005–07) High-income countries and Europe's transition economies Net, global (decoupled payments are included in the higher, dashed line)

Figure 7.3. Gross subsidy equivalent of NRAs in high-income and European transition economies and in developing countries, 1960 to 2007 (constant 2000 US$ billion) Source: Anderson (2009, Ch. 1), based on estimates in Anderson and Valenzuela (2008).

around US$ 8,000 and by 2000–2004 it had risen to US$ 10,000 on average (and US$ 25,000 in Norway, Switzerland and Japan), or US$ 13,500 when ‘decoupled’ payments are included. By contrast, the GSE in developing economies was –US$ 140 per farmer in the first half of the 1980s, which is a non-trivial tax when one recalls that at that time the majority of these people’s households were surviving on less than US$ 1 a day per capita. By 2000−2004 they received on average around US$ 50 per farmer (Anderson 2009, Ch. 1). While this represents a major improvement, it is less than one per cent of the support received by the average farmer in a high-income country. The average NRA for developing countries conceals the fact that the exporting and import-competing subsectors of agriculture have very different NRAs. Figure 7.4 reveals that while the average NRA for exporters has been negative throughout (going from −20 per cent to −30 per cent before coming back up to almost zero in 2000–2004), the NRA for import-competing farmers in developing countries has fluctuated between 20 and 30 per cent (and even reached 40 per cent in the years of low prices in the mid-1980s). Having increased in the 1960s and 1970s, the anti-trade bias within agriculture (the taxing of both exports and imports) for developing countries has diminished since the mid-1980s,

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(a) Developing countries 90 70 50 30 10 –10

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Figure 7.4. Nominal rates of assistance to exportable, import-competing and all covered agricultural products,a high-income and developing countries, 1955 to 2007 (per cent) a Covered products only. The total also includes nontradables. Source: Anderson (2009, Ch. 1), based on estimates in Anderson and Valenzuela (2008).

but the NRA gap between the import-competing and export subsectors still averages around 20 percentage points. Figure 7.4 also reveals that the NRA for import-competing farmers in developing countries has increased at virtually the same pace as that in high-income countries. This suggests that growth in agricultural protection is something that tends to begin at low levels of per capita income rather than being a phenomenon exclusive to high-income countries. The improvement in farmers’ incentives in developing countries is understated by the above NRAag estimates, because those countries have also

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–20 –40 –60

Figure 7.5. Nominal rates of assistance to agricultural and non-agricultural sectors and relative rate of assistance,a developing and high-income countries, 1955 to 2004 (per cent, production-weighted averages across countries) a The RRA is defined as 100*[(100+NRAnonagt)/(100+NRAnonagt)–1], where NRAagt and NRAnonagt are the percentage NRAs for the tradables parts of the agricultural and non-agricultural sectors, respectively. Source: Anderson (2009, Ch. 1), based on estimates in Anderson and Valenzuela (2008).

reduced their assistance to producers of non-agricultural tradable goods, most notably manufactures. The decline in the weighted average NRA for non-agricultural tradable goods, depicted in Figure 7.5, was clearly much greater than the increase in the average NRA for tradable agricultural sectors

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for the period to the mid-1980s, consistent with the findings two decades ago of Krueger, Schiff and Valdés (1988, 1991). For the period since the mid1980s, changes in the NRAs of both sectors have contributed almost equally to the improvement in incentives to farmers. The RRA, captured in equation (2) above, provides a useful indicator of relative price change: the RRA for developing countries as a group went from −46 per cent in the second half of the 1970s to 1 per cent in the first half of the present decade. This increase (from a coefficient of 0.54 to 1.01) is equivalent to an almost doubling in the relative price of farm products, which is a huge change in the fortunes of developing country farmers in just a generation. This is mostly because of the changes in Asia, but even for Latin America this relative price hike is one-half, whereas for Africa this indicator improves by only one-eighth. As for highincome countries, assistance to manufacturing was on average much less than assistance to farmers, even in the 1950s, and its decline since then has had only a minor impact on that group’s average RRA (Figure 7.5).2 While the RRA captures the extent of anti- or pro-agricultural bias in policies across sectors, the TBI defined in equation (1) above is able to capture the extent to which the exporting and import-competing subsectors of agriculture have very different NRAs. Figure 7.6 shows the TBI of agriculture on the horizontal axis and the RRA on the vertical axis. An economy with no anti- or pro-agricultural bias (RRA = 0) and no anti- or pro-trade bias within the farm sector (TBI = 0) would be located at the intersection of the two axes in Figure 7.6. Africa, Asia and Latin America (shown in Figure 7.6 as LAC) were all well to the south-west of that neutral point in the period 1980–1984, but by 2000–2004 all had moved to become much closer to the vertical axis (meaning they had reduced their anti-trade bias in agriculture), and all but Africa had become closer to the horizontal axis. Asia is now above rather than below that axis, which means that developing countries in Asia are assisting farmers relative to producers of other tradable products. While this can lead to just as much waste of resources as the earlier anti-agricultural policy bias, it is only in Korea and Taiwan that the RRA for 2000–2004 is well above zero (being just 1 per cent for China and 4 per cent for Southeast Asia). Turning to the single indicators of the impact of agricultural distortions on national economic welfare and trade volume, Lloyd, Croser and Anderson (2009) estimate their WRI and TRI for the 75 countries in the 2

Australia and New Zealand were clear exceptions, where manufacturing protection had been very high and its decline occurred several decades later than in other high-income countries (Anderson, Lloyd and MacLaren 2007).

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Figure 7.6. Relationship between RRA and the trade bias index for agriculture, various regions, 1980–1984 and 2000–2004 Source: Anderson (2009, Ch. 1), using the formulae in equations (1) and (2) and NRA and RRA estimates in Anderson and Valenzuela (2008).

above-mentioned World Bank study. The results for the WRI shown in Figure 7.7 indicate a steady rise from the 1960s to the 1980s for agricultural policies to reduce welfare, but some decline in the 1990s. This reflects the fact that NRAs for high-income and developing countries diverged (in opposite directions) away from zero in the first half of the period under study and then converged towards zero in the most recent quarter-century. That meant that their weighted average NRA traces out a fairly flat trend whereas the WRI traces out a hill-shaped path and thus provides a less misleading indicator of resource misallocation in world agricultural markets. The TRI indicates that the trade restrictiveness of agricultural policy for developing countries as a group was roughly constant until the early 1990s and thereafter it declined, especially for Asia and Latin America, while for high-income countries the decline in TRI began a few years later. The TRI for developing countries is driven by the exportables subsector which was being taxed until recently and the import-competing subsector which was and is increasingly being protected (albeit less than in high-income countries). For high-income countries, policies have supported both exporting and import-competing agricultural products and, even though they strongly favour the latter, the assistance to exporters has offset somewhat the antitrade bias from the protection of import-competing producers.

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(a) Trade reduction index

Developing countries

Europe’s transition economies

High-income countries

(b) Welfare reduction index

Developing countries

Europe’s transition economies

High-income countries

Figure 7.7. Trade reduction and welfare reduction indexes for tradable farm products, by region, 1960 to 2007 (per cent) Source: Lloyd, Croser and Anderson (2009), based on NRAs and CTEs in Anderson and Valenzuela (2008).

Effects of past reforms and of remaining policies: results of economy-wide modelling It is clear from the above that there has been a great deal of reform over the past quarter of a century of policy distortions to agricultural incentives throughout the world: the anti-agricultural and anti-trade biases of the policies of many developing countries have been reduced, the export subsidies of high-income countries have been cut, and some re-instrumentation towards less inefficient and less trade-distorting forms of support, particularly in Western Europe, has begun. However, protection from agricultural import competition has continued to show an upward trend in both rich and poor countries, notwithstanding the Uruguay Round Agreement on Agriculture that aimed to bind and reduce farm tariffs. What have been the net economic effects of agricultural price and trade policy changes around the world since the early 1980s? And how do those

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effects on global markets, farm incomes and economic welfare compare with the effects of policy distortions that were still in place as of 2004? Valenzuela, van der Mensbrugghe and Anderson (2009) used a global economy-wide model known as Linkage (van der Mensbrugghe 2005) to provide a combined retrospective and prospective analysis that sought to assess how far the world had come, and how far it still has to go, in rectifying the disarray in world agriculture. It quantifies the impacts both of past reforms and current policies by comparing the effects of the recent World Bank project’s distortion estimates for the period 1980–1984 with those of 2004. While international food prices in mid-2008 were well above those of 2004 (Figure 7.1), the slump in these prices over the second half of 2008 suggests that prices in 2009 may not be so different from those of 2004, and in any case the Doha Round negotiations have been using such a historical period against which to draw up reform proposals. Several key findings from that economy-wide modelling study are worth emphasising. First, the policy reforms from the early 1980s to the mid-2000s improved global economic welfare by US$ 233 billion per year, and removing the distortions that remained in 2004 would add another US$ 168 billion per year (in 2004 US dollars). This suggests that in terms of global welfare the world had moved three-fifths of the way towards global free trade in goods over that quarter century. Second, developing economies benefited proportionately more than high-income economies (1.0 per cent compared with 0.7 per cent of national income) from those past policy reforms, and would gain nearly twice as much as high-income countries if all countries were to complete that reform process (an average increase of 0.9 per cent compared with 0.5 per cent for high-income countries). Of those prospective welfare gains from global liberalisation, 60 per cent would come from agriculture and food policy reform. This is a striking result given that the shares of agriculture and food in global GDP and global trade are only 3 and 6 per cent, respectively. The contribution of farm and food policy reform to the prospective welfare gain for developing countries alone is even greater, at 83 per cent. Third, the share of global farm production exported (excluding intraEuropean Union (EU) trade) in 2004 has been slightly smaller as a result of those reforms since 1980–1984, because of fewer farm export subsidies. The 8 per cent share of agriculture in 2004 contrasts with the 31 per cent share for other primary products and the 25 per cent for all other goods – a ‘thinness’ that is an important contributor to the volatility of international prices for weather-dependent farm products. If the policies distorting goods trade in 2004 were removed, the share of global production of farm products

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that is exported would rise from 8 to 13 per cent, thereby reducing instability of prices and reducing the quantities of those products traded. Fourth, the developing countries’ share of the world’s primary agricultural exports rose from 43 to 55 per cent, and its share of farm output from 58 to 62 per cent, because of the reforms since the early 1980s, with rises in output of nearly all agricultural industries except rice and sugar. Removing the remaining goods market distortions would boost their export and output shares even further, to 64 and 65 per cent, respectively. Fifth, the average real price for agricultural and food products in international markets would have been 13 per cent lower had policies not changed over the past quarter century. Evidently the impact of the fall in RRA in highincome countries (including the cuts in farm export subsidies) leading to raised international food prices, more than offset the opposite impact of the RRA rise (including the cuts in agricultural export taxes) in developing countries over that period. By contrast, removing the remaining distortions as of 2004 is projected to raise the international price of agricultural and food products by less than 1 per cent on average. This is in contrast to earlier modelling results based on the Global Trade Analysis Project (GTAP) database. (For example, Anderson, Martin and van der Mensbrugghe (2006) estimated that they would rise by 3.1 per cent or, for primary agriculture alone, by 5.5 per cent.) The smaller impact seen in these new results is because export taxes in developing countries based on the above NRA estimates for 2004 are included in the new database (most notably for Argentina) and their removal would offset the international price-raising effect of eliminating import protection and farm subsidies elsewhere. Sixth, for developing countries as a group, net farm income (value added in agriculture) is estimated to be 4.9 per cent higher than it would have been without the reforms of the past quarter century, which is more than ten times the proportional gain in non-agricultural value added. If the farm price and trade policies remaining in 2004 were removed, net farm incomes in developing countries would rise a further 5.6 per cent, compared with just 1.9 per cent for non-agricultural value added. In addition, unskilled workers in developing countries – the majority of whom work on farms – would see their returns rise more than returns on other productive factors from that liberalisation. Together, these findings suggest that both inequality and poverty could be alleviated by such reform, given that three-quarters of the world’s poor are farmers in developing countries (Chen and Ravallion 2008). No Doha Round agreement would involve a move all the way to free trade, and its partial reforms would only involve cuts to tariffs and agricultural subsidies. In particular, the WTO is likely to continue to

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leave export taxes to the discretion of each national government. Had such a model simulation been run, it would have resulted in international food prices rising by more than the 1 per cent quoted in the fifth point above – but recall that that refers to 2004 prices, which may well be low relative to the prices operating when any Doha agreement is signed.

Prospects for agricultural reform under Doha The reasons why some countries have reformed their price-distorting agricultural and trade policies more than others in recent decades are varied. Some have reformed unilaterally, apparently having become convinced that it is in their own national interest to do so. China is the most dramatic and significant example of the past three decades among developing countries, and Australia and New Zealand among the highincome countries (Anderson, Lloyd and MacLaren 2007, Huang et al. 2009). Other developing countries may have done so partly to secure bigger and better loans from international financial institutions and then, having taken that first step, they have continued the process, even if somewhat intermittently. India is one example, but there are numerous other examples in Africa and Latin America. Few have gone backwards in terms of increasing their anti-agricultural bias, but Zimbabwe and perhaps Argentina qualify during the present decade – and numerous others joined them in 2008, at least temporarily, in response to the sudden upward spike in international food prices. And some have reduced their agricultural subsidies and import barriers at least partly in response to the GATT’s multilateral Uruguay Round Agreement on Agriculture, the EU being the most important example (helped by its desire for otherwise costly preferential trade agreements, including its expansions eastwards in 2004 and 2007). The EU reforms suggest that growth in agricultural protection can be slowed and even reversed if accompanied by re-instrumentation away from price supports to decoupled measures or more direct forms of farm income support (Josling 2009). The starker examples of Australia and New Zealand show that one-off buyouts can bring faster and even complete reform.3 But in the developing countries where levels of agricultural

3

Anderson, Lloyd and MacLaren (2007). For a detailed analysis of the buyout option versus the slower and less complete cashout option (moving to direct payments), as well as the uncompensated gradual squeeze-out or sudden cutout options, see Orden and Diaz-Bonilla (2006).

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protection are generally below those in high-income countries, there are fewer signs of a slowdown of the upward trend in agricultural protection from import competition over the past half-century. Indeed, there are numerous signs that the governments of developing countries want to keep open their options to raise agricultural NRAs in the future, particularly via import restrictions. One indicator is the high tariff bindings to which developing countries committed themselves following the Uruguay Round: as of 2001, actual applied tariffs on agricultural products averaged less than half the corresponding bound tariffs for developing countries of 48 per cent, and less than one-sixth in the case of least-developed countries (Anderson and Martin 2006, Table 1.2). Another indicator of reluctance about agricultural trade reform is the demand by many developing countries to be allowed to maintain their rates of agricultural protection for reasons of food security, livelihood security and rural development. This view has succeeded in bringing ‘special products’ and a ‘special safeguard mechanism’ into the multilateral trading system’s agricultural negotiations, even though such policies, which would raise domestic food prices in developing countries, may worsen poverty and reduce the food security of the poor, and would exacerbate instability in international markets for farm products. Those developing economies that continue to free up domestic markets and practice good macroeconomic governance will keep growing. Typically the growth will be more rapid in manufacturing and service activities than in agriculture, especially in the more densely populated countries where agricultural comparative advantage is likely to decline. Whether such economies become more dependent on imports of farm products depends, however, on what happens to their relative RRA. The first wave of Asian industrialisers (Japan, and then Korea and Taiwan) chose to slow the growth of dependence on food imports by raising their NRA for agriculture even as they were bringing down their NRA for nonfarm tradables, such that their RRA became increasingly further above the neutral zero level. A key question is: will later industrialisers copy advanced economies, given the past close association of RRAs with rising per capita income and falling agricultural comparative advantage? Figures 7.4 and 7.5 suggest developing countries’ RRA trends of the past three decades were on the same upward trajectory as the high-income countries prior to the 1990s. So unless new forces affect their polities, the governments of later industrialising economies may well follow suit. One new force is disciplines on farm subsidies and protection policies of WTO Members since the Uruguay Round. Earlier industrialisers were

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not bound under GATT to limit their agricultural protection. Had there been strict disciplines on farm trade measures at the time Japan and Korea joined GATT in 1955 and 1967, respectively, their NRAs may have been halted at less than 20 per cent (Anderson 2009, Figure 1.12). At the time of China’s accession to WTO in December 2001, its NRA was less than 5 per cent according to Huang et al. (2009), or 7.3 per cent for import-competing agriculture alone. Its average bound import tariff commitment was about twice that (16 per cent in 2005), but what matters most is China’s out-of-quota bindings on the items whose imports are restricted by tariff rate quotas. These tariff bindings, as of 2005, were 65 per cent for grains, 50 per cent for sugar and 40 per cent for cotton (Anderson, Martin and Valenzuela 2009). Clearly the legal commitments even China made on acceding to WTO are a long way from current levels of support for its farmers, and so are unlikely to constrain the government very much in the next decade or so. And the legal constraints on developing countries that joined the WTO earlier are even less restrictive. For India, Pakistan and Bangladesh, for example, their estimated NRAs for agricultural importables in 2000–2004 are 34, 4 and 6 per cent, respectively, whereas the average bound tariffs on their agricultural imports are 114, 96 and 189 per cent, respectively (WTO, ITC and UNCTAD 2007). Also, like other developing countries, they have high bindings on product-specific domestic supports of 10 per cent, and another 10 per cent for non-product-specific assistance, a total of 20 more percentage points of NRA (17 per cent in China’s case) that legally could come from domestic support measures – compared with 10 per cent currently in India and less than 3 per cent in the rest of South Asia. Hopefully developing countries will choose not to make use of the legal wiggle room they have allowed themselves in their WTO bindings to follow Japan, Korea and Taiwan into high agricultural protection. A much more efficient and equitable strategy would be to treat agriculture in the same way that they have been treating non-farm tradable sectors. That would involve opening the sector to international competition, and relying on more efficient domestic policy measures for raising government revenue (e.g. income and consumption or value-added taxes in lieu of trade taxes)4 and for assisting farm families (e.g. public investment in 4

Developing countries are becoming less and less reliant on trade taxes as a source of government revenue, with even very poor countries realising that a tax imposed at the border, if called a consumption tax rather than a tariff, does not induce protected domestic production and yet can raise the same revenue at the same collection cost as a tariff.

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rural education and health, rural infrastructure, and agricultural research and development). Investment in public agricultural R&D in developing countries as a group is currently equivalent to less than 1 per cent of the gross value of farm production (about half the rate of high-income countries). Given the extremely high rates of return at the margin on such investments (see, e.g. Fan 2008), expenditure on that would be far wiser than providing border or domestic farm price supports as emerging economies develop. The above distortion estimates show that all high-income countries have lowered the price supports for their farmers since the 1980s, in some countries partly replacing them with assistance that is at least somewhat decoupled from production. If this trend continued at the pace of the past quarter century, and if there was a reversal in the growth of agricultural protection in developing countries, then before the middle of this century most of the disarray in world food markets would have gone. However, if the WTO’s Doha Development Agenda collapses, and the governments of high-income countries therefore find it more difficult to ward off agricultural protection lobbies, it is all the more likely that developing countries will follow the same agricultural protection path this century as that taken last century by high-income countries. With the spike in food prices in the first half of 2008 and the subsequent downturn in the global economy, now is an especially crucial time for governments to do what is necessary to bring the Doha Round to a successful conclusion so as to restore the confidence of consumers and investors in the global trading system.

References Anderson, K. (ed.) 2009. Distortions to Agricultural Incentives: A Global Perspective, 1955–2007. London: Palgrave Macmillan and Washington, DC: World Bank (forthcoming). Anderson, K., Kurzweil, M., Martin, W., Sandri, D. and Valenzuela E. 2008. ‘Measuring Distortions to Agricultural Incentives, Revisited’, World Trade Review 7: 675–704. Anderson, K., Lloyd, P. J. and MacLaren, D. 2007. ‘Distortions to Agricultural Incentives in Australia since World War II’, The Economic Record 83: 461–82. Anderson, K. and Martin, W. (eds.) 2006. Agricultural Trade Reform and the Doha Development Agenda. London: Palgrave Macmillan and Washington, DC: World Bank. Anderson, K., Martin, W. and Valenzuela, E. 2009. ‘Long-Run Implications of WTO Accession for Agriculture in China’, in Carter, C. and Sheldon, I.

past, present and prospective policies under doha 185 (eds.), China’s Agricultural Trade: Issues and Prospects. London: CABI (forthcoming). Anderson, K., Martin, W. and van der Mensbrugghe, D. 2006. ‘Distortions to World Trade: Impacts on Agricultural Markets and Farm Incomes’, Review of Agricultural Economics 28: 168–94. Anderson, K. and Valenzuela, E. 2008. ‘Global Estimates of Distortions to Agricultural Incentives, 1955–2007’, spreadsheet available at www.worldbank.org/agdistortions Chen, S. and Ravallion, M. 2008. ‘The Developing World is Poorer than We Thought, but no less Successful in the Fight against Poverty’, Policy Research Working Paper 4703, Washington, DC: World Bank. Fan, S. 2008. Public Expenditures, Growth and Poverty in Developing Countries: Issues, Methods and Findings. Baltimore, MD: Johns Hopkins University Press. Huang, J., Rozelle, S., Martin, W. and Liu, Y. 2009. ‘China’, in Anderson, K. and Martin, W. (eds.), Distortions to Agricultural Incentives in Asia. Washington, DC: World Bank. Josling, T. 2009. ‘Western Europe’, in Anderson, K. (ed.), Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007. London: Palgrave Macmillan and Washington, DC: World Bank (forthcoming). Krueger, A. O., Schiff, M. and Valdés, A. 1988. ‘Measuring the Impact of Sectorspecific and Economy-wide Policies on Agricultural Incentives in LDCs’, World Bank Economic Review 2: 255–72. ——1991. The Political Economy of Agricultural Pricing Policy, Volume 1: Latin America, Volume 2: Asia, and Volume 3: Africa and the Mediterranean. Baltimore, MD: Johns Hopkins University Press for the World Bank. Lloyd, P., Croser, J. and Anderson, K. 2009. ‘Welfare- and Trade-reducing Indexes of Distortions to Agricultural Incentives’, in Anderson, K. (ed.), Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007. London: Palgrave Macmillan and Washington, DC: World Bank (forthcoming). OECD 2008. Producer and Consumer Support Estimates (online database accessed at www.oecd.org). Orden, D. and Diaz-Bonilla, E. 2006. ‘Holograms and Ghosts: New and Old Ideas for Reforming Agricultural Policies’, in Anderson, K. and Martin, W. Agricultural Trade Reform and the Doha Development Agenda. London: Palgrave Macmillan and Washington, DC: World Bank. Prebisch, R. 1950. The Economic Development of Latin America and its Principal Problems, New York: United Nations. Singer, H. W. 1950. ‘The Distribution of Gains Between Borrowing and Investing Countries’, American Economic Review 40(2): 473–85, May. Valenzuela, E., van der Mensbrugghe, D. and Anderson, K. 2009. ‘General Equilibrium Effects of Price Distortions on Global Markets, Farm

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Incomes and Welfare’, in Anderson, K. (ed.), Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007, London: Palgrave Macmillan and Washington, DC: World Bank (forthcoming). van der Mensbrugghe, D. 2005. ‘l i n k a g e Technical Reference Document: Version 6.0’, Unpublished, Washington, DC: World Bank. Accessible at www.worldbank.org/prospects/linkagemodel Williamson, J. 2008. ‘Globalization and the Great Divergence: Terms of Trade Booms and Volatility in the Poor Periphery, 1782 to 1913’, NBER Working Paper 13841, Cambridge, MA: National Bureau of Economic Research. WTO, ITC and UNCTAD 2007. Tariff Profiles 2006. Geneva: World Trade Organization.

8 The food crisis and the role of the EC’s Common Agricultural Policy bernard o’connor *

Introduction This chapter looks at the European Union’s (EU) Common Agricultural Policy (CAP) in the light of the current food crisis. It does so against the common prejudice that the CAP has been a major factor in contributing to global food imbalances and the creation of a truly global agricultural market. The charges laid against the CAP are numerous. From an economic viewpoint they can be distilled down to the concept of distortion of markets. In particular, the economists argue that by protecting the domestic EU market in favour of local production and by subsidising the export of surplus production, the EU has distorted the global food market and undermined the rational allocation of resources for the production and distribution of food. Some economists argue further that the continuing subsidisation of the domestic farm sector, even where the subsidies are not linked to production, exaggerates these distortions even further. From an EU budgetary point of view the argument is made that agriculture has received a disproportionate amount of state resources. It is accepted politico-economic theory that, from a market perspective, any distortion will have negative impacts on those who do not benefit from the distortion. In addition, the distortions can lead to unforeseen consequences. This second observation is particularly true of the CAP which, by the late 1970s, had become so successful that the EU needed to export the surpluses created by it at prices distorted by subsidies. But does this mean that the current CAP must be scrapped? And if the CAP was to be scrapped would it lead to the lowering of high * Bernard O’Connor, Professor of Law, O’Connor and Company, Brussels, Belgium.

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commodity prices, to food security and the equitable distribution of food in the global market? Governments have always regulated agricultural markets. A stable food supply is essential for civilisation. Without it there can be no freeing of humankind from the land for the pursuit of other activities. In addition, all markets, whatever their nature, depend on good regulation for their proper functioning. At its most basic, law provides the framework for peaceful exchange and the enforcement of contracts. At its most sophisticated, the law determines what can be traded and in what condition, who can trade, the conditions of trade and the obligations of traders to each other, to the market and to society. So what needs to be addressed is not necessarily the scrapping of the CAP but the way agricultural markets need to be regulated as we move from a series of distinct regional markets to a single global food market. This chapter examines some of the facts of EC agricultural trade and in particular where EC agricultural imports come from and where they go to, as well as what kind of agricultural products the EC exports and what importing markets receive them. The chapter then looks at the level of the border protection in place (including most favoured nation (MFN) and preferential market access), as well as the sorts of subsidies being provided both domestically and for exports. As far as possible this examination takes into account the various reforms to the CAP that have been implemented in recent years. The chapter ends with a series of conclusions which question the extent to which the new reformed CAP does in fact distort the global market.

Agriculture in the EU The EU is the world’s leading exporter and importer of agricultural products and is therefore one of the key players in any reform of agricultural trade policies. The contribution of agriculture (including livestock, hunting and forestry) to gross domestic product (GDP) and employment in the EU is relatively small. The sector employs about 9.7 million people on 9.9 million agriculture holdings in the EU-25; in the ten new Member States that joined in May 2004, around 3.4 million people are employed on 3.6 million holdings.1 That number increased even more with the accession of Romania and Bulgaria, both of which are 1

A holding in the EC is defined as a technical-economic unit (under single management) engaged in agricultural production. Eurostat 2005, Agriculture, Forestry and Fisheries,

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SHARE IN WORLD'S CEREAL PRODUCTION IN 2004 (%)

US EU-25 THE REST OF THE WORLD

Figure 8.1. EC share in world’s cereal production Source: FAOSTAT, 2004.

characterised by large agricultural sectors. Among the pre-accession Member States, France has the largest agricultural area, followed by Spain and Germany. Most of the agricultural area is dedicated to field cropping and grazing livestock, each accounting for 48.3 million hectares or about 33 per cent of the total agricultural area; mixed farming (crops and livestock) accounted for 25.2 per cent of the total agricultural area.2

Agricultural production in the EU Cereals According to latest information available, cereal production in the EU (see Figure 8.1) was estimated to stand at 257 million tonnes for the 2007–2008 marketing campaign, a decrease of 3.3 per cent (about 9 million tonnes) compared to 2006–2007. This equals 12.2 per cent of the global cereal production. France remains the leading cereal producer in the EU, with a total of 59 million tonnes (−4.3 per cent). It is followed by Germany with 41 million tonnes (–6.8 per cent) and Poland with 27 million tonnes.3 The EU-27 cereal area is estimated to have declined from 57.1 million hectares in 2006 to 56.5 million hectares in 2007 (−0.9 per cent).

2

3

available at: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CD-05-001-7/ EN/KS-CD-05-001-7-EN.PDF (accessed 20 January 2009). See: WTO Secretariat, ‘The European Communities and the WTO’, EU Trade Policy Review (hereinafter TPR), 2006, 80, available at: http://www.wto.org/english/thewto_e/countries_e/european_communities_e.htm (accessed 20 January 2009). See: Directorate General Agriculture and Rural Development (DG AGRI hereinafter), The Meat Sector in the EU, 2004, 2, available at: http://ec.europa.eu/agriculture/publi/ fact/meat/2004_en.pdf (accessed 20 January 2009).

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bernard o’conn or SHARE IN WORLD'S MEAT PRODUCTION IN 2004 (1,000 TONNES)

EU US THE REST OF THE WORLD

Figure 8.2. EU share in world meat production Source: FAOSTAT, 2004.

The main reasons for this decrease are the less favourable climatic conditions in some EU regions – there has been a decline of the maize area of about 14.5 per cent in the EU-15 – and continuing implementation of the 2003 CAP reform (in particular ‘decoupling’).4

Meat The EU is a major meat producer, accounting for over 16 per cent of world meat production, and is a big player in meat trading. The EU’s net share of world trade in meats is 12.8 per cent rising to 39 per cent for pig meat.5 In 2004, the EU-25 produced 42.3 million tonnes of meat, accounting for 16.3 per cent of global meat production (260 million tonnes) (see Figure 8.2).6 According to the latest figures available, EU beef and veal production is estimated to have declined to 8 million tonnes in 2007 (−0.3 per cent). Pig meat production is expected to have increased to 22.1 million tonnes (1.3 per cent) in 2007. EU poultry meat production was estimated at 11.2 million tonnes in 2007.7 4 6

7

Ibid. 5 Ibid. See: FAOSTAT, Food and Agriculture Organization of the United Nations, Production of Cereals and Share in World (2004), available at: http://www.fao.org/statistics/yearbook/ vol_1_1/pdf/b01.pdf. Production of Meat and Share in World (2004), available at: http:// www.fao.org/statistics/yearbook/vol_1_1/pdf/b02.pdf (both accessed 20 January 2009). See: DG AGRI, Agriculture in the European Union. Statistical and Economic Information, 2007, 18, available at: http://ec.europa.eu/agriculture/agrista/2007/table_en/index.htm (accessed 20 January 2009).

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The EU’s beef and veal market was severely affected by the bovine spongiform encephalopathy (BSE) crises of 1996 and 2000–2001, and by the measures taken in response to this crisis.8 Moreover, the total cow herd declined by more than 1.6 million animals over the 2001–2004 period due to the combined effect of constant milk quotas and increasing milk yields.9 As a result, EU beef and veal production fell from 8.4 million tonnes in 1999 to 8 million tonnes in 2004.10 The EU has been a net importer of beef and veal since 2003. Its exports of beef and veal have decreased since 2004. The introduction of the decoupled single payment by some Member States as from 2005,11 combined with a slight relative increase in cereal feed prices, is expected to reduce the incentives for intensive beef and veal production, causing a reduction in production to around 7.6 million tonnes by 2012.12 Beef and veal consumption is projected to stagnate at around 8.2 million tonnes over the medium term, largely due to price increases and low consumer preference for beef meat.13 The EU is anticipated to increase its imports of beef and veal to over 0.7 million tonnes by 2012, while its exports are expected to fall significantly, partly because of lower competitiveness in world markets.14

8

9

10

11

12 13

14

It is estimated that during 1996–2004, more than 8 million animals were withdrawn from the slaughter schemes, and around 6 million calves were subject to emergency supply-side schemes, in an effort to keep supply as close as possible to falling consumption. For the EU as a whole, some two-thirds of the beef produced is derived directly or indirectly from dairy herds. Meat from dairy herds swells overall agricultural output by some 10 per cent. See: DG AGRI, Beef and Veal, Agricultural Markets-Animal Products. Available at: http://www.europa.eu.int/comm/agriculture/markets/beef/index_en.htm (accessed 20 January 2009). See: The ten new Member States contribute around 8 per cent of EC-25 beef and veal production and 6 per cent of consumption. Eurostat 2005, Agriculture, Forestry and Fisheries, available at: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CD-05001-7/EN/KS-CD-05-001-7-EN.PDF (accessed 20 January 2009). Ibid. In December 2004, slaughtering was 10 per cent higher than (on average) in the past because some Member States decided to apply the single payment scheme as from 2005. See: TPR, 93. Beef prices in the ten new Member States increased by 10–30 per cent upon enlargement. During the past ten years beef consumption has fallen by up to 50 per cent in the ten new Member States, in line with the significant reduction in beef production and price increases. See: Eurostat 2005, Agriculture, Forestry and Fisheries, available at: http:// epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CD-05-001-7/EN/KS-CD-05-0017-EN.PDF (accessed 20 January 2009). See: TPR, 93.

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Sugar The EU is a key player on world sugar markets, with a 14 per cent share of production (third largest producer), a 12 per cent share of consumption, a 12 per cent share of exports and a 5 per cent share of imports.15 Sugar is produced throughout the EU, with the exception of Cyprus, Estonia, Luxembourg and Malta. France, Germany and Poland account for half of the EU’s sugar production.16 The EU’s sugar beet area reached 1.75 million hectares in 2007–2008. Due to the very good weather conditions in Western and Northern Europe sugar production exceeded 17 million tonnes in the EU-27.17 Agricultural imports into, and exports from, the EU The EU is the world’s biggest exporter of agricultural products. In 2003, the EU’s agricultural exports were worth US$ 66 billion (compared to US$ 64 billion for the US). By 2005, the EU’s exports were worth US$ 79 billion (compared to US$ 68 billion for the US) and accounted for around 20 per cent of world exports.18 The EU’s exports of individual commodities account for a major portion of world trade: wine (18 per cent), pig meat (11.6 per cent), poultry meat (11.5 per cent), cheese (12.5 per cent), milk powder (10.1 per cent); butter (20.1 per cent), and sugar (19.7 per cent).19 The EU is also the world’s leading importer of agricultural products, with imports accounting for around US$ 85 billion (2006). From 2000 until 2005, the EU had been running a consistent, albeit decreasing, deficit of around US$ 6 billion. This changed in 2006, when the EU became a net agricultural exporter.20 The historical evolution of the EU’s net trade of major agricultural commodities is shown in Table 8.1. In the first nine months of 2007 the overall value of EU agricultural exports increased strongly by 5.3 per cent with wide divergences across 15 17

18

19

20

See: TPR, 94. 16 See: TPR, 94. See: DG AGRI, Agriculture in the European Union. Statistical and Economic Information, 2007, p. 18, available at: http://ec.europa.eu/agriculture/agrista/2007/ table_en/index.htm (accessed 20 January 2009). See: DG AGRI, The Changing Face of EU Agricultural Trade, MAP: Monitoring Agritrade Policy, 2007, available at: http://ec.europa.eu/agriculture/publi/map/02_07.pdf (accessed 20 January 2009). See: 2005 World Production and Trade in the Principal Agricultural Products: The EU’s share of the world market, available at: http://ec.europa.eu/agriculture/agrista/2007/ table_en/375.pdf (accessed 20 January 2009). Ibid.

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Table 8.1. EU-25 agricultural trade (2000–2006) in billion US$ Year

Exports Imports Balance

2000

2001

2002

2003

2004

2005

2006

58.3 58.8 −0.5

58.7 60.5 −1.8

63.4 64.2 −0.8

75.2 75.5 −0.3

77.4 79.6 −2.2

79.5 79.5 0.1

90.7 84.7 6.0

Source: COMEXT database (inward processing included).

agri-food products. The increase was particularly marked for vegetable products (+250 per cent), oilseeds and oleaginous fruits (+35.6 per cent), dairy products (+24.5 per cent) and cereals (+22.8 per cent). The only falls in exports were for sugar and sugar confectionary (–55.1 per cent) and, to a lesser extent, for the category ‘other WTO products outside chapters 1–24’21 (−7.2 per cent). The overall value of agricultural imports in the first nine months of 2007 rose by 9.6 per cent over that for the same period of 2006. As a result, the EU’s agricultural trade balance turned negative with a trade deficit of € 657 million, against an overall trade surplus of € 1.5 billion in the first nine months of 2006.22 Figure 8.3 shows the evolution of the EU’s trade in agricultural products following the recent enlargements. In 2005 the EU-15 had already become a small net exporter of around € 500 million while the EU-25 remained a small net importer. By 2006 the trend was clear with the EU-25 emerging as a net exporter valued at € 4.8 billion (the EU-15’s net trade surplus was of around € 1 billion more). The trend is the same if we consider an advanced EU-27 aggregate for 2006, including Bulgaria and Romania.23

21

22

23

Definitions of agricultural products, by chapter, as defined in the Combined Nomenclature, Annex 1 of Agricultural Trade Statistics, available at: http://ec.europa. eu/agriculture/agrista/tradestats/annexes/annex1.htm (accessed 20 January 2009). See: DG Agriculture, Agriculture in the European Union. Statistical and Economic Information, 2007, p. 17, available at: http://ec.europa.eu/agriculture/agrista/2007/ table_en/index.htm (accessed 20 January 2009). See: DG AGRI, The Changing Face of EU Agricultural Trade, MAP: Monitoring Agritrade Policy, 2007. Available at: http://ec.europa.eu/agriculture/publi/map/index_en. htm (accessed 20 January 2009).

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Balance of trade in millions of euros

1000 500 0 2003

2004

2005

–500 EU-15 EU-25

–1000 –1500 –2000 –2500 –3000 Year

Figure 8.3. EU-15, EU-25 agricultural trade balance Source: European Commission, Directorate General Agriculture and Rural Development. MAP: Monitoring Agri-trade Policy, The Changing Face of EU Agricultural Trade.

Overview of EU imports Brazil, which supplies 14 per cent of EU imports (2003–2005), is the biggest supplier of agricultural products to the EU. The US comes second with 11 per cent, followed by Argentina with 7 per cent. The imports from Brazil to the EU in 2005 were valued at US$ 12 billion, compared to US$ 8.5 billion for those from the US and US$ 6 billion for those from Argentina. Turkey and New Zealand were in 4th and 5th place (Figure 8.4). The EU’s top two imports are soybean meal (an intermediate product) and soybeans (a commodity), valued at US$ 4.9 and US$ 4.5 billion, respectively, and together accounting for 12 per cent of imports in 2003– 2005 (Figure 8.5). The other imports in the top five are finished products: coffee (US$ 3.8 billion), bananas (US$ 3.7 billion) and wine (US$ 3.1 billion). The soya market is particularly concentrated, with nearly 100 per cent of the EU’s imports of soybean meal coming from the key suppliers Argentina and Brazil and imports of soybeans from Brazil and the US. Brazil is also the top supplier of coffee. Ecuador, Colombia and Costa Rica are the dominant banana suppliers. Meanwhile Australia dominates EU wine imports (worth US$ 1 billion which is nearly one third of the market), while Chile, South Africa and the US each account

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10000 9000

Value in millions of euros

8000 7000 6000 5000 4000 3000 2000 1000 0 Brazil

Argentina

US

New Zealand

Turkey

Figure 8.4. EU agricultural imports by origin Source: Directorate-General (DG)–AGRI, Agricultural Trade Statistics.

4.5

Value in billions of euros

4 3.5 3 2.5 2 1.5 1 0.5

W

he a Ap t pl So es ym ea C l of So fe yb e ea Ba ns na na s C W oc oa ine be an R T aw ob s a ca cc C ne o ru su de g pa ar lm Fr es oil h b Fo Al eef od Fr m pr es on ep d h gr s ar ap at io ns es N .E .S .

0

Figure 8.5. EU-25 import value of main products Source: European Commission, Directorate General Agriculture and Rural Development. MAP: Monitoring Agri-trade Policy, The Changing Face of EU Agricultural Trade. N.E.S., not elsewhere specified.

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Imports from DCs in billions of dollars

80 70 60 50 40 30 20 10 0 EU-25

USA

Canada

Australia New Zealand

Japan

Figure 8.6. Comparison of agricultural imports from developing countries (DCs) Source: European Commission, Directorate General Agriculture and Rural Development. MAP: Monitoring Agri-trade Policy, The Changing Face of EU Agricultural Trade.

for around US$ 500 million. Together these five products accounted for 25 per cent of EU imports in 2003–2005.

Imports from developing countries The EU continues to be by far the biggest importer of agricultural products from developing countries, importing US$ 53 billion worth of goods in 2003–2005. This is more than the imports of the US, Japan, Canada, Australia and New Zealand put together: the value of their joint imports from developing countries was only US$ 46 billion in the same period. As much as two-thirds of total EU imports come from developing countries compared to one-third on average for the five countries shown in Figure 8.6. Care is needed in examining these figures. The developing countries include Brazil – which, as has been seen, is the main supplier of agricultural products to the EU, with a share in total EU imports (14 per cent) – as well as Argentina (7 per cent). Brazil’s imports are thus nearly as high as the share of the whole African, Caribbean and Pacific (ACP) group of countries put together (15 per cent), a group that benefits from preferential agreements. The share of the four Mercosur countries (Argentina, Brazil, Paraguay and Uruguay) at 22 per cent far

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Share of imports from LDCs (%)

70 60 50 40 30 20 10 0 EU 27

China

USA

Japan

Canada

Figure 8.7. Comparison of countries’ agricultural imports from least-developed countries Source: European Commission, Directorate-General (DG) Trade, European Union and the world.

outweighs that of the ACP group, reflecting the importance of soybean and soymeal in EU imports and which enter the EU duty-free.24 The proportion of EU agricultural imports from least-developed countries (LDCs), when compared to imports by other countries, is even more striking. While the EU-27 imports 57.8 per cent of its agricultural imports from LDCs, the share of imports from LDCs going to other major agricultural importers is far smaller: 23.2 per cent for China, 9.3 per cent for the US, 8.7 per cent for Japan and only 0.9 per cent for Canada (Figure 8.7).

Overview of EU exports The top EU export markets are developed countries. This reflects the focus of EU exports on finished goods. The US is the single biggest market, taking 21 per cent of EU exports (2003–2005). Switzerland and Japan each take around 7 per cent of EU exports, as indicated in Figure 8.8. Russia, a transition economy, is in second place with 8 per cent. In 2005 exports from the EU to the US were valued at US$ 17 billion 24

Ibid.

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Value in millions of euros

12000 10000 8000 6000 4000 2000 0 US

Russia

Switzerland

Japan

Norway

Canada

Figure 8.8. EU-25: agricultural exports by destination Source: Directorate-General (DG) – AGRI, Agricultural Trade Statistics.

Value in billions of euros

4 3.5 3 2.5 2 1.5 1 0.5 he r a and at ni c r m al eam O do fe ed r in Fo ifero g od us pr su Wi ep bs ne ar ta at nc io es ns N .E W .S hi sk i Pi es Ar gm tic ea le s t fo B rs ee hi r ps C an hee d s ai e rc ra ft Su Sp Ci ga iri gar r ts e fro tte m s w in e .fo

Pr ep

So

lid

m

Sp

ilk

ar

kl

in

g

W

w

in e

0

Figure 8.9. EU-25 main agricultural exports Source: European Commission, Directorate General Agriculture and Rural Development. MAP: Monitoring Agri-trade Policy, The Changing Face of EU Agricultural Trade. N.E.S., not elsewhere specified.

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whereas those to Russia were valued at US$ 6 billion), and those to Switzerland and Japan were both around US$ 5 billion. The top exports are all processed goods (see Figure 8.9). Spirits and wines (valued at US$ 6.6 billion and US$ 5.5 billion, respectively) are the most important, followed by food preparations (US$ 3.3 billion), aromas (US$ 3.2 billion) and beer (US$ 2.5 billion) in 2003–2005. Together these products account for nearly 30 per cent of total exports, with the US the key market for all of them. Figure 8.9 also shows the concentration of exports in key markets, thus the five markets identified account for 80 per cent of the EU’s wine exports.25 Using the most recent Comext data for 2006 (expressed in €), the trend towards processed goods continues, with 13 out of the top 15 exports being in this category: the exceptions are wheat (a commodity) and sugar (an intermediate product). Food preparations, pig meat, cheese, sugar and other dairy products fall within the top 15. And it is striking that five of the top 15 exports are alcohol products, sales of which grew strongly in 2007. Wine is the EU’s highest value export.

EU market access The EU grants, as a minimum, MFN treatment to all WTO Members, and unilateral preferences through its generalised scheme of tariff preferences (GSP scheme) and the Economic Partnership Agreements (EPAs). The GSP scheme has three different arrangements; the most far-reaching of these,26 the Everything but Arms (EBA) initiative, grants duty-free and quota-free access to the EU market for least-developed countries.27 According to the 2007 Trade Profiles,28 published by the WTO Secretariat, the EU average bound ad valorem MFN tariff on agricultural imports is 15.4 per cent. The average MFN applied tariff is 15.1 per cent. This is much higher than the tariffs on manufactured goods, which 25 26

27 28

Ibid. The EU Generalized System of Preferences (GSP) is a system of preferential trading arrangements with 178 developing countries. GSP provides real economic value to developing countries, with €57 billion worth of trade under the scheme in 2007. A new Regulation applying the EC’s GSP has already been adopted for the period from 1 January 2009 until the end of 2011, maintaining preferential access to the EU market for 176 developing countries. At present, 49 developing countries belong to the category of LDCs. See: WTO, Trade Profiles 2007, European Union (25), 60, available at: www.wto.org/ english/res_e/booksp_e/anrep_e/trade_profiles07_e.pdf (accessed 20 January 2009).

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average 3.9 per cent. At the same time, as much as 43.2 per cent of agricultural goods enter the EU as MFN duty-free imports.29 If account is taken of the preferential tariffs applied on exports of developing countries, and the lower tariffs negotiated under regional or bilateral trade agreements, the estimated EU average applied tariff is around 10 per cent in agriculture. However, tariffs for some commodities remain very high, especially for those countries that are not eligible for preferences.30 MFN tariffs on cereals average 55.2 per cent, with rates ranging up to 116.6 per cent (Table 8.2). MFN tariffs on meat products average 25.3 per cent, with rates ranging up to 427.9 per cent. MFN tariffs on sugar and sugar products average 39.2 per cent, with rates ranging up to 84.6 per cent.31 In 2005, the EU had 91 tariff quotas on agricultural products.32 These products included beef, sheep, goats, chicken, turkey, milk products, eggs, potatoes, fruit and vegetables, wheat, barley, rice, maize, starch, mushrooms, sausages, sugar and grape juice. Quotas are managed by the Commission through a licensing system based on: first-come-first-served (for 28 tariff quotas), historical imports (for 20), and mixed allocation methods (for 43).33 The average fill ratio for tariff quotas was 62 per cent in 2002.

Export programmes The EU provides export subsidies based on provisions laid down in the single Common Market Organisation (Single CMO regulation). The level of subsidies is determined by the European Commission acting in consultation with the EU Member States, as and when necessary, and often on a weekly basis. According to the latest data provided to the WTO, the EU granted a total of € 3.1 billion in export subsidies during the marketing year 2002–2003; the highest payments go to milk products such as yoghurt, milk and cream and whole milk powder (19.0 per cent), butter and butter oil (17.4 per cent), incorporated products (13.2 per cent), sugar (9.3 per cent), and beef meat (9.1 per cent).34 Actual outlays were 58 per cent below the EU export 29 32

33

34

Ibid. 30 See: TPR. 31 See: TPR. Commission Regulation No. 1719/2005 of 27 October 2005 amending Annex I to Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff. This includes methods involving licences issued on a first-come-first-served basis and systems where licence requests are reduced pro rata where they exceed available quantities. WTO, G/AG/N/EEC/44, 11 June 2003 and G/AG/N/EEC/52, 16 February 2005.

Table 8.2. Summary analysis of EU-applied MFN tariffs, 2006 Applied 2006 rates Simple avg. tariff (%)

Tariff range (%)

Std-dev (%)

CV

0–427.9

14.0

2.0

18.6 27.3 42.4 18.8 4.3 16.2 55.2 7.4 15.2 19.7 6.1 10.5

0–427.9 0–427.9 1.6–134.4 0–163.8 0–19.2 0–300.8 0–116.6 0–137.2 0–209.8 5.2–74.9 0–122 0–26

27.1 39.9 28.8 19.7 4.4 22.1 33.4 16.3 22.7 20.8 14.7 6.6

1.5 1.5 0.7 1.0 1.0 1.4 0.6 2.2 1.5 1.1 2.4 0.6

10.9

0–167.2

20.4

1.9

Analysis

No. of linesa

No. of lines used

Total By WTO definitionb Agriculture Live animals and products thereof Dairy products Coffee and tea, cocoa, sugar, etc. Cut flowers and plants Fruit and vegetables Grains Oil seeds, fats, oils and their products Beverages and spirits Tobacco Other agricultural products Fish and fishery products By ISIC sectorc Agriculture, hunting, forestry and fishing

9,843

9,741

6.9

2,059 331 155 300 62 437 55 164 272 30 253 381

1,957 295 123 294 62 437 55 162 253 30 246 381

598

594

a

Tariff rates are based on a lower frequency (number of lines) since lines with no ad valorem equivalents are excluded. Some 41 tariff lines are excluded from both WTO agriculture and non-agriculture definitions (essentially petroleum products). International Standard Industrial Classification (Rev.2). Electricity, gas and water are excluded (1 tariff line). CV = coefficient of variation. Source: WTO Secretariat estimates, based on EU Official Journal L 286; imports data provided by the EU. b c

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subsidies commitments in the WTO, i.e. an increase of 21.8 per cent over the 2001–2002 level (of about € 2.6 billion). The main increase was in milk products, while refunds for beef meat, wine, fruit, and vegetables declined. Ten items received actual subsidies of more than 50 per cent of the specific commitments, with three receiving almost the entirety of the specific export subsidy commitments: poultry meat (99.8 per cent), alcohol (94.1 per cent) and ‘incorporated products’ (99.7 per cent). The subsidies cover the difference between the higher EU internal prices and the lower world market prices of the products; therefore, they change with world prices, exchange rate fluctuations, and domestic price levels. In terms of their value, export subsidies notified by the EU represent approximately 90 per cent of all the WTO Members’ notified export subsidies. This may be one of the reasons they loom so large in agricultural negotiations. The European Commission has indicated that the overall level of export subsidies granted by the EU is likely to fall, due to market reforms and the declining number of products eligible for such subsidies as well as rising commodity prices.35 The recent price rises in commodities have been accompanied by a significant fall in the level of subsidisation. In addition the EU is committed to scrapping export subsidies completely. The EU continues to base its position on the 2004 Framework Agreement and the Ministerial Declaration adopted in Hong Kong in December 2005, which stipulates that WTO Members agree to ensure the parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect by the end of 2013.36

The original CAP system for the management of markets A brief history of the CAP to the present day The Common Agricultural Policy (CAP) dates from the early 1960s. Its emphasis was on encouraging better productivity in the food chain, largely for food security reasons, but also to ensure that the EU had a viable agricultural sector and that consumers had a stable supply of affordable food. The CAP offered subsidies and guaranteed prices to farmers, providing incentives for them to produce. These subsidies developed into a comprehensive framework of ‘common market organisations’ (CMOs) for several crop and livestock products. From the mid-1960s and throughout the 1970s, the CAP financial assistance was provided for the restructuring of farming, for example by 35

See: TPR.

36

See: TPR.

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aiding farm investment, with the aim of ensuring that farms developed in size and in management and technology skills so that they were adapted to the economic and social climate of the day. Some human and territorial elements were introduced in the form of assistance towards early retirement and vocational training and specific support measures for less favoured areas (LFAs). The CAP was very successful and, by the 1980s, the EU had to contend with almost permanent surpluses of the major farm commodities, some of which were exported (with the help of subsidies), while others had to be stored or disposed of within the EU.

CAP objectives The objectives of the Community in regulating the agricultural sector are set out in the basic treaty creating the EU common market. EC Treaty Article 33 provides: 1. The objectives of the common agricultural policy shall be: a) to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour; b) thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture; c) to stabilise markets; d) to assure the availability of supplies; e) to ensure that supplies reach consumers at reasonable prices. These objectives have remained the same since they were first established in 1957. There has been no move to amend them in any of the various treaties which have reformed the EU since the mid-1980s. The failed Lisbon Treaty would not have made any amendment either. In line with Article 33 the CAP aims to: * * *

guarantee food supplies at stable and reasonable prices; ensure a fair standard of living for farmers, and improve agricultural productivity through technical progress and develop more rational production systems that would employ resources more efficiently.

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CAP mechanisms Employing a variety of mechanisms, the original CAP provided support generally by maintaining stabilised internal prices, above world prices, and for unlimited quantities of most products. Border protection insulated domestic markets from world market forces. Support regimes varied, but for the major products, including grains, milk products, and beef and veal, support involved: * * *

variable import levies; unlimited intervention purchasing at guaranteed price levels; and variable export subsidies or taxes as required.

The CAP system was a market-based system. Farmers remained free to produce or not to produce, to choose what sort of product to produce – and lose if their products did not comply with market needs. What in essence the CAP provided was a price floor to the market which guaranteed farmers a minimum price for their products. At the same time the CAP placed a price ceiling on the market to limit the prices paid by consumers. The price floor stimulated production and, as the CAP became successful, needed to be maintained by ever greater subsidisation. The subsidies were payable on production only.

CAP reform Major reform packages have significantly modified the CAP since the mid-1990s. The first reform, adopted in 1992 and implemented in 1993– 1994, began the process of shifting farm support from price support to direct payments to farmers independent of production. The 1992 reforms reduced support prices and compensated farmers for lower prices with direct payments based on historical yields, and introduced new supply control measures. These reforms affected the grain, oilseed, protein crop (field peas and beans), beef, and sheep meat markets, but farmers had to produce the commodity to receive a payment. The second reform, Agenda 2000, was implemented, beginning in 2000, in preparation for the accession of ten new members (mostly from central and eastern Europe) in May 2004. Similar to the first CAP reform, Agenda 2000 used direct payments to compensate farmers for half of the losses expected from the price support cuts. Again, payments depended on production. Agenda 2000 reforms focused on the grain, oilseed, dairy and beef markets.

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205

EC MARKET

BORDER PROTECTION

TARGET PRICE

MARKET PRICE

INTERVENTION PRICE

WORLD MARKET PRICE

Figure 8.10. A graphic representation of the main CAP instruments

A midterm review of Agenda 2000 resulted in a third major set of reforms in June 2003 and April 2004. The 2003 reforms allow for decoupled payments, payments that are not dependent on production. Nor do the payments vary by commodity. Called single farm payments (SFP), these decoupled payments are based on 2000–2002 historical payments and replace the compensation payments of the 1992 reform. Compliance with EU regulations regarding the environment, animal welfare, and food quality and safety is required for agricultural producers to receive the SFP. Moreover, land not being farmed must be maintained in good agricultural condition. Coupled payments, which can differ from one commodity to another and require planting a crop, are allowed to continue, to reinforce environmental and economic goals in marginal

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areas. In practice, coupled payments are only used by a few Member States. Cuts in intervention prices were made for rice, butter, and skimmed milk powder; these came into effect in 2005. Intervention support for storage was limited for rice and butter and eliminated for rye in 2004. In addition, increases in the CAP budget ceiling have been limited to 1 per cent per annum during 2007–2013, and, if market support and direct payments combine to come within € 300 million of the budget ceiling, the SFP will be reduced to stay within budget limits. Similar reforms of the market organisations for hops and Mediterranean products, cotton, tobacco and olive oil, was completed in April 2004. These reforms follow the logic of the 2003 reforms, with decoupled payments based on historical payments and compliance with EU regulations. Sugar reform came into force in July 2006.

Domestic price support Domestic price support for production was the historical backbone of the CAP. This has been largely replaced by direct payments, which now account for around 70 per cent of the CAP budget. Prices for major commodities such as some grains (barley, bread wheat, and corn), oilseeds, dairy products, beef and veal, and sugar still depend on the intervention price as a guaranteed floor price, but at much lower levels than before the reforms. If world prices are high, as at present, then intervention in the market is not needed. Other mechanisms, such as subsidies to assist with storage of surplus and consumer subsidies paid to encourage domestic consumption of products like butter and skimmed milk powder also support domestic prices. The 2003 reforms, however, cut storage subsidies by 50 per cent. Some fruits and vegetables are withdrawn from the market in limited quantities by authorised producer organisations when market prices fall to specified levels. The reforms have lowered the cost of food to consumers, as intervention prices have been reduced. However the direct payment system is a charge on government revenue and thus a charge on the taxpayer, who now pays, whereas the classic CAP put the main burden on the consumer.

Direct payments While price support does continue to ensure some basic farm income, payments made directly to producers provide substantially more income

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support. The payments specified in the 2003 reform are made to farmers based on the average level of payments made during 2000–2002, and no production is required. In the livestock sector, headage payments (payments per animal) are made in the beef and sheep sectors based on 2000–2002 average payments, with no production required. Other special payments are made, but they are relatively minor. In order to receive the SFP, farmers must have previously received certain direct aid. The single payment is calculated on the basis of the aid received by farmers during a reference period (as a general rule 2000, 2001 and 2002, but in certain circumstances 1997, 1998 and 1999 can be regarded as the reference period). The Regulation establishing the right to the SFP lists the payments which are taken into account when allocating the single payment and in particular area-based payments and other payments allocated as support (e.g. deseasonalisation premium, slaughter premium, special premiums for male cattle and suckler cows, and milk products premium). To receive direct payments, beneficiaries must be in possession of payment entitlements. These payment entitlements are allocated to the farmers during the first year of application of the scheme and may be transferred (by sale or lease) to other farmers in subsequent years.37

Supply control The 1992 reforms instituted a system of production controls by means of the mandatory, paid set-aside programme, which is intended to limit production. This system has been maintained through subsequent reforms. To be eligible for direct payments, producers of grains, oilseeds, or protein crops must remove a specified percentage of their area from production. Agenda 2000 set the base rate for the required set-aside for arable crops at 10 per cent. Producers with an area planted with these crops sufficient to produce no more than 92 tonnes of grain are classified as small producers and are exempt from the set-aside requirement. Supply-control quotas have been in effect for the dairy and sugar sectors for two decades. As demand increases it is likely that these mandatory set-aside requirements will be suspended.

37

For more information, see: DG AGRI, Financing the Common Agricultural Policy, 2008, available at: http://ec.europa.eu/agriculture/fin/index_en.htm (accessed 20 January 2009).

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Border measures The CAP maintains domestic agricultural prices above world prices for most products and commodities. In preferential trade agreements, such as those with former colonies and neighbouring countries, the EU satisfies domestic consumer demand while protecting high domestic prices through import quotas and minimum import price requirements. The CAP also applies tariffs at EU borders so that imports cannot be sold domestically below the internal market prices (intervention prices) set by the CAP. The Agreement on Agriculture (AoA) limited the value and quantity of EU export subsidies. Bulk commodities continue to receive export subsidies that allow the EU to remain competitive in world markets. But because of reductions in CAP price supports, the overall production has been limited and the need for export subsidies has declined considerably. EU exports of processed products that contain a portion of a CAPsupported commodity also receive an export subsidy, based on the proportion of the commodity in the product and the difference between the average cost of the raw material and the world price.

Additional aspects of 2003 reform Important components of the 2003 reform reflect a change in the approach to EU agricultural policy. For the first time, much of the pressure to reform the CAP came from environmentalists and consumers. The requirement to comply with environmental and animal welfare standards to qualify for the SFP reflects these pressures. Moreover, farmers must comply with food-quality and food-safety regulations for payments to continue. Another important feature of the 2003 reforms is the move from a price support policy to an income support policy through decoupled payments. EU farmers will have more choice in their planting decisions because of decoupled payments. Commodity support programmes continue to exist but the prices paid are at much lower levels, while direct payments to farmers without requirements to plant a crop are more widespread and represent the greater percentage of the total benefit to the farmers from CAP payments. There is also a marked shift in the way rural development is treated. The 2003 CAP reforms established two pillars in the budget: Pillar I for direct payments and market and price support policies and Pillar II for rural development policies. In the reforms, a ceiling was imposed on

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Pillar I spending; increases are limited to 1 per cent per year in nominal terms from 2007–2013. The budget for rural development was intended to more than double by 2013, but budget restrictions have substantially limited Pillar II spending. In addition, in a concept called modulation, SFP payments greater than € 5,000 are reduced by 5 per cent, while farmers whose SFP is less than € 5,000 are not penalised. The budget funds saved through modulation are transferred to the Pillar II rural development fund. At least 80 per cent of the funds from the penalties will remain in the country where the SFPs were reduced and are to be used for rural development purposes.38

Market management mechanisms other than subsidies Import licences In addition to the regular import licensing system provided for by the Single CMO regulation,39 the Commission may make imports of certain agricultural commodities (i.e. cereals, rice, sugar, seeds, olive oil and table olives, flax and hemp, fruit and vegetables, bananas, live plants, beef and veal, milk and milk products, pig meat, sheep meat and goat meat, eggs, poultry meat and agricultural ethyl alcohol) subject to presentation of an import licence: in such a case, the Commission must take account of the need for import licences for the management of the markets concerned and, in particular, for monitoring the imports of the products in question.40 Import duties The rates of import duty are set in the Common Customs Tariff and have been estimated in ad valorem terms in the WTO to be about 15 per cent. 38

39

40

See: USDA, European Union: Common Agricultural Policy, Additional aspects of 2003 reform, available at: http://www.ers.usda.gov/briefing/EuropeanUnion/policy.htm (accessed 20 January 2009). Council Regulation (EC) No 1234/2007 of 22 October 2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation) (OJ L 299, 16.11.2007, p. 1). Single CMO Regulation was adopted in 2007 and revised the existing 21 basic regulations on sector-specific common market organisations (CMOs). It combined them into a comprehensive single regulation without changing the underlying policies. Article 130 of the Single CMO Regulation. Import licences are issued by Member States to any applicant, irrespective of its place of establishment in the Community, unless a Council Regulation or any other act of the Council provides otherwise. They are valid throughout the Community.

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However, there are many tariff peaks above this average. In addition, certain tariffs remain somewhat flexible. For example, the import duty on high-quality common wheat is set so as to be equal to the intervention price valid at any one time increased by 55 per cent, minus the cost, insurance and freight (c.i.f.) import price applicable to the consignment in question.41 Another exception covers the import duty on husked rice, husked basmati rice varieties and semi-milled or wholly milled rice and for broken rice.42 Regarding the entry price system for the fruit and vegetables and the processed fruit and vegetables sectors, if the application of the common customs tariff duty rate depends on the entry price of the imported consignment, this price is checked using a flat-rate import value calculated by the Commission, by product and by origin, on the basis of the weighted average of prices for the product on Member States’ representative import markets or on other markets, where appropriate. Specific provisions may, however, be adopted by the Commission for verifying the entry price of products imported primarily for processing.43 The Commission can suspend import duties in whole or in part for certain quantities. The classical example is in respect of sugar and isoglucose in order to guarantee the supply necessary for the manufacturing of certain products.44 Special provisions also apply for imports in respect of the mixtures of different cereals, mixtures between cereals and rice and mixtures of rice, hemp and hops.45 For sugar, preferential import arrangements apply.46

Import quota management Tariff quotas for imports are opened and administered by the Commission under detailed rules adopted by the Commission. They are administered in a non-discriminatory manner by applying one or more of the following methods or another appropriate method:

41

42 43 44

45

46

That duty, however, cannot exceed the conventional rate of duty as determined on the basis of the Combined Nomenclature. See Article 135.1 of the Single CMO Regulation. Articles 137–140 of the Single CMO Regulation. Article 140a of the Single CMO Regulation. I.e. bioethanol, alcohol, rum, live yeast and quantities of syrups for spreading and those to be processed into Rinse appelstroop; certain industrial products without sugar content but the processing of which uses sugar, isoglucose or inulin syrup; certain products of the chemical or pharmaceutical industry which contain sugar, isoglucose or inulin syrup. Articles 149–152 of the Single CMO Organisation. For hemps, see Article 157 and for hops see Article 158. Article 153–156 of the Single CMO Regulation.

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(a) a method based on the chronological order of the lodging of applications (‘first come, first served’ principle); (b) a method of distribution in proportion to the quantities requested when the applications were lodged (using the ‘simultaneous examination method’); (c) a method based on taking traditional trade patterns into account (using the ‘traditional/newcomers method’). The method of administration adopted should, where appropriate, give due weight to the supply requirements of the Community market and the need to safeguard the equilibrium of that market.

Export prohibitions and restrictions The Commission may make exports of certain products subject to presentation of an export licence. These products include: cereals, rice, sugar, olive oil and table olives, fruits and vegetables, beef and veal, milk and milk products, pig meat, sheep meat and goat meat, eggs, poultry meat and agricultural ethyl alcohol. These licences serve exclusively monitoring purposes.47 Under existing regulations, exports are not subject to any quantitative restrictions. However, Member States may impose export restrictions, including export authorisations, on a temporary basis. Export restrictions may not be imposed on agricultural products covered by common organisations of markets or processed agricultural products covered by regulations within the framework of Article 308 of the EC Treaty. Exports restrictions may be imposed by the Council, upon recommendation by the Commission based upon a request from a Member State.48 Export refunds The difference between world market quotations or prices and prices in the Community may be covered by export refunds for certain products which are exported without further processing. These products include: cereals, rice, sugar, beef and veal, milk and milk products, pig meat, eggs and poultry meat.49 Export refunds are set at the same level for the whole Community. They may vary according to destination, especially on the basis of the world market situation, the specific requirements of certain markets, or 47 49

Article 161 of the Single CMO Regulation. 48 See: TPR, 27. Articles 162–170 of the Single CMO Regulation.

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obligations resulting from international agreements concluded by the Community. Refunds are fixed by the Commission either at regular intervals or by invitation to tender.

Special safeguards As a general rule WTO Members are not allowed to impose tariffs higher than the bound rate in their schedules of commitments. However, the WTO Agreement on Agriculture allowed countries which converted their market access barriers to tariffs in the Uruguay Round to schedule the use of a special safeguard mechanism. This can be triggered when the import price of a commodity falls below a reference price, or when there is a steep increase in the volume of imports. The EU has 539 tariff items for which the right to take recourse to the SSG has been reserved i.e. 31 per cent of all EU agricultural tariff lines.50 In addition to the specific mechanisms in the CAP itself, the EU can also introduce border measures on the basis of Anti Dumping, Anti Subsidies and Safeguards. Responses to the food crisis As has been seen the CAP has been phenomenally successful. Supporters claim that the food crisis highlights the continuing need for the CAP and the original CAP mechanisms for regulating and stabilising markets. The French Agriculture Minister Michel Barnier suggested exporting the European agricultural model to promote food security to other parts of the world, including developing areas like Africa and Latin America.51 The EU’s Agriculture Commissioner Mariann Fischer-Boel insists that there is no connection between agricultural subsidies in the EU and the rise in food prices. A non-legislative CAP ‘health check’ was proposed by the Commission in November 2007 to set the stage for discussions in advance of formal legislative proposals in May 2008. It proposed, among others, a tighter subsidy regime and a greater shift of funds from direct payments to rural development support – ideas heavily opposed by some of the EU-27 50

51

The information contained in Table 6 is based on the Uruguay Round Trade Negotiation files in the WTO IDB (IDB CD-ROM, Release 2). See: EurActiv, France Argues for CAP Solution to Curb Food Prices, 2008, available at: www.euractiv.com/en/food/france-argues-cap-solution-curb-food-prices/article171996 (accessed 20 January 2009). EurActiv is a key source of information on Community policies.

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agriculture ministers. If implemented this would enhance the move away from the subsidisation of production to the subsidisation of farmers. In May 2008, the European Commission adopted a Communication ‘Tackling the challenge of rising food prices – Directions for EU action’. This Communication sets out elements for an EU response to the food price challenges, proposing actions internal to the EU, and actions to address the effects of the crisis at international level. The European Parliament,52 EU Council of Ministers53 and the European Council54 expressed their concern at the rising prices of food and welcomed the Commission’s initiative. The Commission’s policy response to rising global food prices has three prongs: *

*

*

short-term measures in the context of the CAP ‘health check’ and monitoring of the retail sector; initiative to enhance agricultural supply and ensure food security, including the promotion of sustainable future generations of biofuels; initiatives to contribute to the global effort to tackle the effects of price rises on poor countries.55

The Commission estimates that the short-term (2008–2009) financing needs of most affected developing countries total € 18 billion. This figure is based on an extrapolation of recent individual country assessments. 52

53

54

55

On 22 May, the European Parliament adopted a resolution on rising food prices in the EU and the developing countries, urging the Council to ensure coherence of all foodrelated national and international policies aimed at implementing the right of populations to food. EU Ministers expressed their concern over the effects of the high food prices in developing countries in the Conclusions of the General Affairs and External Relations Council of 27 May and committed to a collective response to the food price challenge. The European Council of 19–20 June re-affirmed that high food prices are severely affecting the situation of the world’s poorest populations and concluded that action is required from the European Union from a development and humanitarian assistance perspective. The European Council welcomed the Commission’s intention to come forward with a proposal for a new fund to support agriculture in developing countries, within the framework of the current Financial Perspectives, and stated that the EU will support a strong agricultural supply response in developing countries, providing in particular the necessary financing for agricultural inputs and assistance in using marketbased risk management instruments. Communication from the Commission to the European Parliament, the Council, the European Social and Economic Committee and the Committee of Regions, Tackling the Challenge of Rising Food Prices: Directions for EU Action, 9, available at: http://ec.europa.eu/commission_barroso/president/pdf/20080521_document_en. pdf (accessed 20 January 2009).

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Moreover, the order of magnitude is supported by the preliminary costing by the UN High-Level Task Force on the Global Food Crisis that estimates the additional donor requirements for agricultural development in all developing countries for 2008 and 2009 at between € 18 billion and € 25 billion. The Commission calculated the European Community’s share of 10 per cent in responding in the short-term to the food price crisis on the basis of the average Community spending on development cooperation i.e. 10 per cent of the worldwide development financing. This implies that the Community would contribute about € 1.8 billion in 2008 and 2009. As the currently available EU instruments could contribute € 800 million in 2008– 2009 (€ 550 million in 2008 and an estimated € 250 million in 2009) the remaining € 1 billion will be covered by the Facility. The Commission proposed to provide the assistance to countries affected by the food price increases through international or regional organisations. All assistance would respond to country-level needs assessments and plans. Payments channelled through international organisations, including regional organisations, will be decided on the basis of their comparative advantage and initiatives proposed and assessed. This could for instance apply to the Food and Agriculture Organization of the United Nations (FAO), International Fund for Agricultural Development (IFAD), United Nations Children’s Fund (UNICEF), the World Food Programme (WFP) or the World Bank. Financing could also be channelled through regional organisations. As short-term responses to the soaring food prices require rapid mobilisation of finance, the proposal suggests quick decision-making and disbursement procedures, by using Contribution Agreements with international organisations, including regional organisations. The high agricultural prices have contributed to a reduction of market expenditure in the 2008 budget and to lower estimates for the 2009 budget within heading 2 of the financial framework. Current estimates indicate that a significant margin will be available in this heading in 2008 and to a lesser extent in 2009. Following its adoption by the Commission, the proposal will be subject to co-decision procedure in Parliament and Council. The fastest possible adoption time under normal procedures, but with only one reading in Parliament, will most likely result in entry into force by the end of 2008. The European Commission also proposed improving the current food distribution programme for the most deprived persons in the EU by

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increasing the budget by two-thirds to around € 500 million from 2009 and extending the range of products which can be provided.56 Originally designed to provide surplus stocks of farm produce (‘intervention stocks’) to needy people, the scheme was amended in the mid1990s to make it possible to supplement intervention stocks with market purchases in certain circumstances. Now that surplus stocks are extremely low and unlikely to increase in the foreseeable future, the scheme should allow market purchases on a permanent basis, to complement the remaining intervention stocks. The choice of food would be for the Member States to make, and food distribution plans would be established for three-year periods. Food would continue to be distributed in cooperation with charities and local social services. From the 2010–2012 plan, the scheme would be co-financed (75 per cent from the EU budget, and 85 per cent in cohesion areas). From the 2013–2015 plan, co-financing would be split 50/50, with the EU budget providing 75 per cent in cohesion regions. Three explicit steps have been taken to respond directly to the exceptionally high prices on cereal markets. First, the Council decided in September 2007 to suspend for 2008 the obligation for farmers to set aside 10 per cent of their arable land. The Council also agreed unanimously on 20 December 2007 to suspend import duties on cereals, with a few exceptions, for the current marketing year (although the impact of this move might be limited, given the low level of effective tariffs). The Council has also decided to increase milk quotas by 2 per cent as from 2008.57

Conclusions The successive CAP reforms have gone a long way towards changing the profile of the EU within the world trade system. It is noteworthy that when the talks on the modalities for agricultural negotiations within the WTO Doha Development Agenda broke down in July 2008, the EU, for the first time in relation to agriculture, was not implicated as in previous 56

57

See more under: DG AGRI, The Commission Proposal: Free Food for Europe’s Poor, 2008, available at: http://ec.europa.eu/agriculture/markets/freefood/index_en.htm (accessed 20 January 2009). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Tackling the Challenge of Rising Food Prices: Directions for EU Action, COM(2008) 321 final, 2008, available at: http://ec.europa.eu/commission_barroso/president/pdf/20080521_document_en.pdf (accessed 20 January 2009).

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rounds. This does not mean that some problems with the EU’s CAP do not remain. But it is a reflection of the scope of the changes that the EU has made over the past 15 years and recognition of the commitments the EU has made to further reforms. When the EU now states that it will respect the commitment to remove all export subsidies by 2013, despite the failure of the Doha Development Agenda, there are few who doubt it. That being said, and in the light of this examination of actual agricultural production and trade, a number of hard questions have to be asked in relation to the CAP and the current food crisis. There are two main criticisms levelled at the CAP. The first, particularly since the commencement of large-scale subsidisation of exports in the late 1970s and early 1980s, is that it (coupled with US Export Enhancement Programme subsidies and food aid policies) caused a fall in world market prices for agricultural commodities. As a result of the Uruguay Round of WTO negotiations these subsidies are now capped. There is no evidence to show that this capping of subsidies has caused the recent rises in the prices for commodities. The question to be addressed is whether further reforms and, in particular, the planned removal of export subsidies, will cause a further rise in prices. Or will they send the right market signals to developing country producers to enable them to compete on a more level playing field? It is not clear that these questions have been addressed by economists. Recent WTO disputes have attempted to quantify the impact of developed country subsidies on world commodity prices. They have shown a downward influence. Common sense would confirm this. However, very little work has been done to show the comparative costs of other problems in developing economy agriculture. Issues to be examined include farm sizes, productivity, chemical use, plant varieties and the overall agricultural knowledge base. To this, of course, must be added the known problem of the cost of doing business in underdeveloped economies. The question which has not been addressed is whether CAP export subsidies are marginal to these local problems or not. The second criticism levelled against the CAP is that it has closed its market to trade and thus hindered the development of agricultural industries (both local and export) in third countries. Would the removal of EU tariff barriers to trade reverse the underdevelopment of thirdcountry agricultural production? There is very little evidence, other than for a few agricultural producers with marked comparative advantage, such as Brazil, Argentina and Thailand, that there would be such a

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reverse. It has been seen that, despite the openness of the EU market to agricultural products from the least-developed countries (a relatively recent development) and the African Caribbean and Pacific (ACP) group of countries, very little trade actually flows. The ACP group of countries account for less exports to the EU than does Brazil. This raises the question as to the extent to which market access is at the root of problems in developing country agriculture. The evidence shows that the EU is not a major exporter of the commodities for which prices have risen. The EU is an exporter of processed food products and its main markets are developed economies, not developing ones. This leads to the conclusion that the CAP is not the cause of, nor a major contributor to, the current food crisis.

References EuroActiv, France Argues for CAP Solution to Curb Food Prices, 29 April 2008. http://www.euractiv.com/en/food/france-argues-cap-solution-curb-foodprices/article-171996 (accessed 20 January 2009). European Commission, Commission Regulation (EC) No 1719/2005 of 27 October 2005 amending Annex I to Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff. OJ L 286, 28.10.2005. –––Council Regulation (EC) No 1234/2007 of 22 October 2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation). OJ L 299, 16.11.2007. –––Directorate General Agriculture and Rural Development, Agriculture in the European Union. Statistical and Economic Information, 2007. http://ec.europa.eu/agriculture/agrista/2007/table_en/index.htm (accessed 20 January 2009). –––Directorate General Agriculture and Rural Development, Agricultural trade statistics, Annex 1, October 2006. http://ec.europa.eu/agriculture/agrista/ tradestats/annexes/annex1.htm (accessed 20 January 2009). –––Directorate General Agriculture and Rural Development, The Changing Face of EU Agricultural Trade, MAP: Monitoring Agri-trade Policy, N. 02–07, July 2007. http://ec.europa.eu/agriculture/publi/map/02_07.pdf (accessed 20 January 2009). –––Directorate General Agriculture and Rural Development, 2005 World Production and Trade in the Principal Agricultural Products: The EU Share of the World Market, 14 November 2007. http://ec.europa.eu/agriculture/agrista/2007/table_en/375.pdf (accessed 20 January 2009).

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–––Directorate General Agriculture and Rural Development, The Commission Proposal: Free Food for Europe’s Poor, 17 September 2008. http://ec.europa. eu/agriculture/markets/freefood/index_en.htm (accessed 20 January 2009). –––Directorate General Agriculture and Rural Development, Financing the Common Agricultural Policy, 30 April 2008. http://ec.europa.eu/agriculture/fin/index_en.htm (accessed 20 January 2009). –––Directorate General Agriculture and Rural Development, Beef and Veal, Agricultural Markets-Animal Products. http://www.europa.eu. int/comm/agriculture/markets/beef/index_en.htm (accessed 20 January 2009). –––Directorate-General Agriculture and Rural Development, The Meat Sector in the EU, 2004. http://ec.europa.eu/agriculture/publi/fact/meat/2004_en.pdf (accessed 20 January 2009). –––Directorate General Trade, European Union and the World: EU 27 Imports from Developing Countries and LDCs, EU Publication Office, 1 August 2008. http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122531.pdf (accessed 20 January 2009). –––Eurostat, Europe in figures, Eurostat yearbook 2005, Agriculture, Forestry and Fisheries, EU Publication Office, 2005 Edition, available at: http://epp. eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CD-05-001-7/EN/KS-CD05-001-7-EN.PDF (accessed 20 January 2009). –––Commission Regulation No. 1719/2005 of 27 October 2005 amending Annex I to Council Regulation (EEC) No 2658/87 on the Tariff and Statistical Nomenclature and on the Common Customs Tariff. –––Tackling the Challenge of Rising Food Prices: Directions for EU action, Communication from the Commission to the European Parliament, the Council, the European Social and Economic Committee and the Committee of Regions, COM(2008) 321 final, 20 May 2008, Brussels. http://ec.europa. eu/commission_barroso/president/pdf/20080521_document_en.pdf (accessed 20 January 2009). FAOSTAT, Food and Agriculture Organization of the United Nations, Production of Cereals and Share in World (2004), FAO Statistical Yearbook 2004, Issue 1. www.fao.org/statistics/yearbook/vol_1_1/pdf/b01. pdf (accessed 20 January 2009). –––Production of Meat and Share in World (2004), FAO Statistical Yearbook 2004, Issue 1. http://www.fao.org/statistics/yearbook/vol_1_1/pdf/b02.pdf (accessed 20 January 2009). USDA, European Union: Common Agricultural Policy, Additional aspects of 2003 reform. http://www.ers.usda.gov/briefing/EuropeanUnion/policy.htm (accessed 20 January 2009). WTO Secretariat, Uruguay Round Trade Negotiation Files, WTO Integrated Database (IDB CD-ROM, Release 2).

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G/AG/N/EEC/44, 11 June 2003. G/AG/N/EEC/48, 27 February 2004. G/AG/N/EEC/52, 16 February 2005. ‘The European Union and the WTO’, EU Trade Policy Review, 2006. www.wto. org/english/thewto_e/countries_e/european_communities_e.htm (accessed 20 January 2009). Trade Profiles 2007, European Union (25). http://www.wto.org/english/res_e/ booksp_e/anrep_e/trade_profiles07_e.pdf (accessed 20 January 2009).

9 WTO disciplines and economic dimensions of the 2008 US Farm Bill david orden* Introduction This chapter focuses on the political economy of the US Food, Conservation and Energy (FCE) Act of 2008 in light of current and potential WTO constraints on domestic support to agriculture. The uncertainty in global markets resulting from very sharp increases in the prices of oil and agricultural commodities in early 2008 and the dramatic global financial crisis and economic downturn later in the year set the stage for this evaluation of the new farm policy. As an exporter of its primary agricultural products, the US has maintained a relatively open market. Tariffs on agricultural imports are generally low (with a few exceptions, notably dairy products and sugar) and have been stable, with limited cuts to bound rates to meet WTO Uruguay Round commitments (Blandford, Laborde and Martin 2008). However, the policy story is more fluid in the domestic support arena where there have been substantial changes in policy instruments, particularly during the fourteenyear period since the Uruguay Round Agreement on Agriculture (URAA) came into effect. Annual acreage idling, a cornerstone of farm programmes since the 1950s, was abandoned in 1996 and was not resurrected during a subsequent period of low commodity prices. Deficiency payments that had been tied to prices and the production of specific crops were also replaced in 1996 by fixed direct payments largely decoupled from production decisions. Public stockholding and the use of export subsidies to dispose of government-held surpluses have almost disappeared, and binding production quotas for peanuts and the entire tobacco price-support programme have been eliminated. * Senior Research Fellow, International Food Policy Research Institute (IFPRI), Washington, d c ; Professor and Director, the Global Issues Initiative (GII), Virginia Tech’s Institute for Society, Culture, and Environment (ISCE), Alexandria, Virginia, USA.

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There have also been steps back towards subsidies tied to prices or production. Deficiency payments linked to market prices (but less closely than before to planted acreage) were reintroduced in 2002. Biofuel mandates and subsidies have emerged as an influential aspect of US policy as part of the security responses to the terrorist attacks of 11 September 2001 and as a reaction to the rise in oil prices that began in 2003. With agriculture’s new battle cry of providing ‘food, fiber and fuel’, the demand-augmenting and price-stimulating effects of biofuel policies have turned upside down the debate about US subsidies depressing world market prices. This has revived pressure not felt since the 1970s against a policy of idling millions of acres of land for supply control and environmental purposes under the long-term Conservation Reserve Program (CRP). The ability of the powerful farm lobby in the US to elicit support in the political arena continues to be evident. Under the FCE Act, farmers retain a stream of fixed direct payments until 2012, despite back-toback years of record net farm income in 2007 and 2008 from strong commodity markets. These payments are perhaps the least trade distorting among support policy instruments and the international disciplines on farm subsidies leave the determination of their level to domestic debate.1 But this is not all the farm lobby retained in 2008. Price support and countercyclical income support programmes were extended and the new Farm Bill included an Average Crop Revenue Election (ACRE) programme under which payments could mount up substantially in an era of high prices. Agriculture also has strengthened political clout to influence agricultural prices through energy policy. Thus, the farm sector is well positioned to receive support in the event of a wide range of contingencies. This is a sobering result for those hoping that a wealthy country like the US with significant agricultural comparative advantage would move away from subsidies that distort agricultural incentives.

US farm policy under the Uruguay Round The long-term transformation of American agriculture in the twentieth century and the circumstances and associated outcomes of farm policy are well described by Bruce Gardner (2009). Once farm programmes 1

OECD (2005) provides a review of theoretical arguments concerning the relative productionand trade-distorting effects of direct payments and other support policies and of empirical studies measuring these effects.

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were established during the wide economic collapse of the 1930s, powerful constituencies formed to defend them. The specific policy instruments have evolved over time with payments made directly by the government emerging as a key instrument to compensate farmers for lower prices. Reforms adopted in the 1996 Federal Agriculture Improvement and Reform (FAIR) Act included an unexpected decoupling of payments on eligible base acres from market prices and planting decisions, an end to annual supply-control acreage reduction programmes (ARPs), and capping of price-support loan rates at low levels (Orden, Paarlberg and Roe 1999). These reforms were adopted under the first capture of control of Congress (in November 1994) by the Republican Party in forty years. A second factor that drove the FAIR Act reforms was a sharp rise in commodity prices in late 1995. As market prices rose above the target prices that triggered subsidy payments under the 1990 Farm Bill, decoupling of payments from prices became a plausible option. In contrast, the URAA had a minimal impact on US farm policy adopted in 1996. The international agreement required few policy changes and no reductions in level of support beyond those already undertaken in the 1985 and 1990 Farm Bills. In WTO terms, the policy shift in the FAIR Act was from one non-limited category of farm support to another – from the blue box, which exempted US (and European) deficiency payments made on partial base acreage and tied to ARP authority, to the WTO green box that included fixed direct payments deemed not to be trade-distorting (Josling, Tangermann and Warley 1996). Both short-term and structural factors were cited in 1995–1996 as evidence that agricultural prices would remain high throughout the decade. When these projections proved erroneous and prices fell, calls arose for a virtual rewriting of farm policy to restore the traditional safety net. Various ‘market loss’ and disaster relief payments were enacted between 1998 and 2001 and these circumstances led the farm lobby to seek a new Farm Bill a year before the FAIR Act was scheduled to expire. It secured congressional commitments for US$ 73 billion in additional spending over ten years, increasing by three-quarters the FAIR-Act baseline of projected spending. The Farm Security and Rural Investment (FSRI) Act, signed into law in May 2002, continued direct payments and extended them to soybeans and other oilseeds. The market-loss payments that Congress had appropriated annually were turned into new mandatory countercyclical payments (CCPs) tied to market prices. In addition, price-supporting commodity loan rates were raised slightly and several new price supports were added. Thus, the bill offered substantial new support guarantees and familiar policy instruments to farm constituents. Most of the newly

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available funding (nearly US$ 50 billion) went to anticipated commodity support. Farmers retained planting flexibility: the fixed direct and countercyclical payments continued to be made based on past production and did not require farmers to grow specific crops.2 The mix of conservation and environmental programmes included in the FSRI Act highlights another aspect of policy discretion. The authority for the CRP under which farmers are paid to idle land on a long-term basis to achieve conservation and environmental benefits increased from 36.4 million acres to 39.2 million acres. However, most new environmental expenditure went towards measures to assist livestock operations (expanding an existing Environmental Quality Incentives Program) and conservation measures on land that remained in production (a new Conservation Security Program). Long-term land idling has historically been enacted as a supply control and conservation measure during times of low prices (the 1930s, the 1960s, and again in 1985) and has expired when market demand strengthened (during World War II and in the 1970s). The expenditures on the CRP and the environmental payments programmes for livestock operations and working fall in the WTO green box. Competitors in world markets naturally do not complain about the reduction in US production that the CRP causes. The CRP had occasionally been criticised for unnecessarily restricting output and keeping world prices higher than they would otherwise have been, but this was not a policy issue with the low market prices in 2002. Passage of the 2002 FSRI Act was met with derision by critics of US policy, but the US commitments under the URAA proved too lax to limit farm spending levels effectively when prices fell after 1997. The US Total Aggregate Measure of Support (AMS) for subsidies tied to production was well below its WTO cap of US$ 19.1 billion when the FAIR Act was passed (Josling 2007). When support provided to farmers began to rise automatically and Congress added new subsidies, the US avoided exceeding its AMS cap by reporting the supplemental market-loss payments as non-product-specific support, which remained well below the de minimis threshold of 5 per cent of the total value of agricultural production. Congress largely ignored the WTO in drafting the FSRI Act despite the launch of WTO negotiations on agriculture in 2000 and the full Doha Development Agenda (Doha Round) in 2001. 2

The decoupling of support from production decisions was partly undermined by a onetime option to update the acreage bases determining the direct payments and the base acreage and fixed yield levels determining the countercyclical payments.

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The 2008 FCE Act There was a high level of interest in a new Farm Bill by 2006 (Orden, Blandford and Josling 2009). Coalitions of groups arguing for reform were active and gained some traction in 2007 when widespread criticisms of farm policy appeared in major urban newspapers (Arha et al. 2007). However, the broader political agenda for both parties was concerned with keeping the support of voters and special interests in the swing states of the Midwest, and reform of farm programmes carried political risks. A new Farm Bill was anticipated in 2007, but the debate spilled over into 2008. As the legislation made its way through Congress, the strategy of farm groups was to keep the structure and budget allocated to the commodity programmes intact, while seeking to build a broader coalition of congressional voting majorities. With both houses of Congress under the control of the Democratic Party after the elections in November 2006, the prospect of increased funding for food stamps and other domestic food assistance to the poor was as important as the future of commodity programmes. If this additional funding was forthcoming then the farm coalition would have been successful in expanding the scope of the Farm Bill without any sacrifice of commodity support. The safety net would be preserved. By 2006, commodity prices had strengthened from the low levels of the early 2000s. Although not as high as they would become in 2008, prices were already projected to remain high enough to reduce price-linked payments sharply (see Table 9.1).

Overview In aggregate terms, the FCE Act that became law in June 2008 distributes expected mandatory expenditures for the fiscal years 2008–2012 in a similar way to levels anticipated under extension of the FSRI Act, as shown in Table 9.2. An increase in total expected outlays of US$ 5 billion, and significant shifts in spending among categories at the margin, reflect the effort to attract a broad coalition of congressional backers through increased expenditures on nutrition, conservation, energy and a host of other programmes targeted at specific constituencies. For the subsequent years 2013–2017 (not shown in the Table), there is a further substantial increase in anticipated expenditures on nutrition if the FCE Act is renewed. It only remained within the ten-year baseline budget projection of the Congressional Budget Office (CBO), as required by Congress, by including nearly US$ 10 billion worth of new revenues.

Table 9.1. Costs of the main US farm subsidies, 1996–2006 and projected 2007–2012 (billion US dollars) Commodity programmes

Other subsidies

Price-linked Year

Ad hoc and Direct1(fixed) Countercyclical 2 Price support3 Conservation4 disaster5

Crop and revenue insurance6

Actual 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

5.19 6.29 5.66 5.47 5.07 4.10 5.30 5.27 5.26 5.22 5.58

0.0 0.0 2.81 5.47 5.46 4.63 1.80 0.54 4.29 4.75 3.16

0.0 0.58 4.11 9.71 9.04 8.43 3.52 1.14 5.55 6.62 1.40

2.01 1.96 1.95 1.76 1.79 1.91 2.51 2.45 3.04 3.40 3.43

0.16 0.16 2.32 2.34 3.67 1.43 3.58 1.74 2.10 0.30 0.27

0.64 0.12 0.75 1.51 1.39 1.77 2.89 1.86 1.12 0.76 1.60

Estimated/ projected 2007 2008 2009 2010 2011 2012

5.44 5.36 4.56 4.53 4.53 4.56

1.03 0.35 0.10 0.23 0.40 0.54

0.91 0.03 0.08 0.11 0.11 0.09

3.46 3.75 4.19 4.41 4.52 4.82

0.06 0.76 0.76 0.76 0.76 0.76

0.87 5.04 4.39 4.38 4.39 4.42

Notes: Includes production flexibility contract and fixed direct payments; excludes peanut and tobacco buyout payments. 1996–2005 includes crop market loss assistance payments and countercyclical payments; excludes dairy market loss payments. 3 Includes four loan-rate-related programmes (loan deficiency payments, marketing loan gains/payments, certificate exchange gains and commodity loan forfeit); 1996–2005 also includes dairy market loss payments, oilseed payments, cotton user marketing payments, and miscellaneous smaller payments; 2007–2012 includes only dairy market loss payments (from CBO score of FCE Act). 4 1996–2005 includes resource retirement and environmental payments notified in the green box; 2006–2012 includes all Commodity Credit Corporation (CCC) conservation programmes. 5 Includes disaster relief reported in the green box, emergency payments reported in total AMS (before de minimis) and various disaster assistance programmes reported as non-product-specific de minimis support; 2006 estimate from USDA, 2007 from CBO; 2008–2012 based on equal division of FCE new mandatory budget for permanent disaster relief outlays. 6 Net indemnities calculated as indemnities minus premiums paid by producers. Sources: All columns up to 2005 are from US notifications to the WTO; commodity programmes for 2006–2012 are from the Blandford-Josling (2008) WTO notifications simulator database (US Department of Agriculture (USDA) 2008a and other sources); conservation and crop and revenue insurance for 2006–2012 are from Congressional Budget Office (CBO) (2008a). 1 2

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Table 9.2. Aggregate projected outlays under the 2008 FCE Act Billion US dollars, FY2008–FY2012 estimated outlays

Category Commodity support Conservation Crop insurance Energy Nutrition Other Total

CBO projected baseline under 2002 FSRI

Proposed adjustments (House; Senate versions of the new Farm Bill)

Final FCE Act

43.3

−1.0; −3.5

41.6

21.4 25.7

2.8; 4.4 −4.0; −3.7

24.1 21.8

0.0 186.0 7.9 284.0

2.4; 1.0 4.2; 5.3 1.5; 2.0 5.9; 5.5

0.6 188.9 12.0 289.0

Source: Congressional Budget Office (2008b) and Congressional Research Service (Chite 2007 and Johnson 2008).

The projected commodity programme spending of US$ 41.6 billion for 2008–2012 under the FCE Act comprises mostly fixed direct payments that traditional subsidy recipients defended against reductions. In contrast, commodity support had been US$ 59.3 billion during the previous five fiscal years and had been projected to rise to US$ 78 billion during those years when the 2002 Farm Bill was written (Chite 2007). Thus, although farmers retained their support programmes, they did not avoid a squeeze-down of anticipated payments under high market prices in the FCE Act. Authority for the CRP was reduced to 32 million acres but expected expenditures for conservation programmes increased by US$ 2.7 billion to US$ 24.1 billion, reaching almost 60 per cent of the projected commodity support, compared to just one-quarter during the previous five years. In this sense, in the event that projected high prices are realised, a substantial relative shift towards conservation and the environment will take place in farm programme outlays. But farmers remained well protected if prices turn out lower than projected – through retention, and even a marginal strengthening, of the loan-rate and countercyclical tiers of commodity support. The FCE Act offered new demand-augmenting support for fruits and vegetables but did not authorise production of these crops on base acres, which was opposed

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by domestic growers.3 The FCE Act also extended support through dairy market loss payments and created new payments to processors of domestic or imported cotton to replace the ‘Step 2’ payments to processors of domestic cotton that had been ruled in violation of WTO rules in the case brought by Brazil (WTO 2005). Various other titles of the Farm Bill expanded and added programmes for biofuels, horticultural crops and disaster assistance. Throughout the debate of 2007–2008 most farm groups remained wary of any changes to existing programmes, despite the rising prices for oil and farm commodities in 2006–2007 and the boom that caused commodities to hit record price levels in the first half of 2008. Nor was there much of a budgetary incentive to change policy instruments. Relatively high prices were built into the 2007 CBO baseline budget projection used by Congress. Therefore, there was little of the opportunity that had arisen in 1995–1996 to capture projected expenditures that would not materialise because of high prices. New instruments could deliver higher spending in the FCE Act only if their fiscal cost was approved by the Congress or misjudged in budget analysis, while holding on to the existing loan rate and countercyclical programmes bore little political cost to the farm lobby. With high farm commodity prices in 2008, the fixed direct payments came under scrutiny in the domestic policy debate. Decoupling is encouraged by WTO rules as a way of providing an attractive non-trade-distorting support option. But with the direct payments making up so large a share of the commodity support anticipated under the FCE Act, proponents of alternative spending eyed a reduction in direct payments to fund other priorities. The direct payments were retained only after a rancorous domestic confrontation, particularly in terms of income eligibility limits for recipients. Payment eligibility criteria were tightened modestly (to caps on non-farm income of US$ 500,000 for all three commodity support programmes and farm income of US$ 750,000 for direct payments only). 3

Domestic growers of fruits and vegetables were concerned about expanded supplies and lower prices and objected to having to compete with farmers receiving subsidies on base acres. The domestic growers’ objections parallel the challenges being raised within the WTO to the notification of direct payments in the green box as allegedly decoupled. In the WTO challenges, however, the objection is to the adverse effects on prices of the subsidised crops from restrictions on planting that limit movement into fruits and vegetables. The FCE Act included only a small pilot programme to allow production on base acreage of certain fruits and vegetables (for processing on 60,000 acres in seven Midwestern states) with any such acreage planted being ineligible for support payments during that year.

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Ethanol Among the proximate causes of the 2007–2008 boom in commodity markets were the US ethanol fuel tax credit and ethanol use mandates, designed to promote corn-based fuel production. These are highly product-specific policy instruments reinforced by a high import duty. Initiated in 1978, the tax credit, together with other federal and state incentives, had only induced a modest level of ethanol output (less than two billion gallons in 2005) until oil prices rose and new blending mandates were enacted. The federal ethanol tax credit of US$ 0.51 per gallon added more than US$ 1.50 to the break-even price that could be paid for corn converted into ethanol (Tyner 2007). The subsidy exceeded US$ 3 billion by 2007 and the Energy Policy Act of 2005 mandated that production reach 7.5 billion gallons by 2012. As oil prices rose, the armed conflicts in Iraq and Afghanistan seemed endless, and concerns about climate change gained traction in the US policy debate, both political parties called for increased energy security for the US. The Energy Independence and Security (EIS) Act of December 2007 expanded the mandate for biofuel production to 36 billion gallons by 2022 of which up to 15 billion gallons were to come primarily from corn-based ethanol. Model-based estimates of the effect on corn market prices ranged from an increase of 25 per cent (US$ 0.74 per bushel) in 2006 due to the tax credit assuming the mandate was not binding (de Gorter and Just 2007), to 12–14 per cent (by then also around US$ 0.70) in 2008–2009 (Babcock 2008) or averaged for 2011–2017 (FAPRI 2008) due to the mandates, tax credits and import duties. At a time when record oil prices were stimulating ethanol production in early 2008, the new Farm Bill reduced the ethanol tax credit to US$ 0.46 per gallon but extended the ethanol import duty until 2012.

New revenue guarantees In one respect the sharp rise in prices in 2008 shifted policy towards a new instrument, as occurred in 1995–1996. In this case, however, the shift was towards a programme more closely tied to market prices. The FCE adopted an optional new revenue guarantee programme, the Average Crop Revenue Election (ACRE) programme, which is likely to be considered productspecific trade-distorting support in the WTO. Starting with the 2009 crop, farmers electing ACRE for all covered commodities for the duration of the FCE Act incur a 20 per cent cut in direct payments and a 30 per cent cut in

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their loan rates. In exchange, if crop revenue for the state (yield per planted acre times the national price) is below a guaranteed level, and enrolled producers incur a loss of revenue for that crop on their farms, then they are assured of payments of up to 25 per cent of the revenue guarantee. The guarantee is 90 per cent of the revenue derived from the two-year national average of lagged prices times the five-year Olympic average (dropping the highest and lowest values) of past state yields (Committee on Agriculture 2008; Zulauf 2008). This guarantee covers 83.3 per cent of the acreage planted (or considered to be planted) by a farmer for each of the covered commodities; thus it is coupled to current production. Once the initial peracre guarantee is established for a farmer entering the programme, it cannot vary by more than 10 per cent from the previous year’s guarantee, moderating any sharp downturn in revenue. In assessing the cost of the Farm Bill, the CBO concluded that only a relatively small fraction of farmers would enrol in the ACRE programme and that its cost would be modest. But with prices at historically high levels in the first half of 2008, the administration argued that initiating ACRE using the moving average of recent prices ran the risk of inducing subsidy payments at much higher price levels than under the target prices of the countercyclical payments programme. As an example, the administration assumed that 90 per cent of farmers opted for the ACRE programme and found that payments for corn alone would be nearly US$ 4 billion in 2009 at prices as high as US$ 4.00 per bushel, compared to no countercyclical payments at prices above the corn target of US$ 2.63 per bushel (USDA 2008b). Although the ACRE payments decline once prices stabilise, this example illustrates that ACRE raises the price level at which subsidy payments would occur during a transition period when high prices fall. The ACRE programme opened the most substantial opportunity within the FCE Act to avoid a squeeze-down of subsidy payments resulting from high prices, as acknowledged by its proponents (Brasher 2008). Blandford and Josling (2008) concluded that ACRE programme payments would in some years exceed commodity-specific caps under negotiation in the Doha Round if the prices of corn, wheat and soybeans during 2007–2012 followed a pattern similar to those of the 1970s, 1980s or 1990s.

Other farm support programmes Other than the ACRE programme, which provides an optional new revenue guarantee, the traditional crop and revenue insurance programmes had

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expanded at increased costs to the government in the early 2000s. The FCE Act stipulated that total premiums be adjusted slightly to equal total indemnities payments over time (resulting in an expected loss ratio equal to one) and reduced the subsidisation of the administrative costs of delivering crop and revenue insurance programmes by lowering payments made to the insurance agents. Larger claimed savings (almost US$ 2.8 billion of the savings shown in Table 9.2) were achieved simply by postponing the timing of some payments. But the cost of the subsidies for crop and revenue insurance was projected to rise because of the projected high commodity prices (Table 9.1). Congress had also appropriated annual disaster relief to agriculture that averaged about US$ 2.1 billion annually during 2000–2005. The FCE Act created mandatory funding (Supplemental Revenue Assistance (SURE)) for five disaster-relief programmes by amending the Trade Act of 1974 to establish a mandatory programme (of nearly US$ 4 billion over five years) financed from import duties. Again this was a step towards avoiding a squeeze-down of support to agriculture by ensuring at least partial availability of funds for disaster relief without requiring annual congressional appropriations. Slight increases in loan rates and target prices contained in the FCE Act strengthen policy instruments coupled to production. This will prove innocuous (with the exception of raising the sugar loan rate) if prices remain well above loan-rate levels as projected.4 But these parameter adjustments are another signal of the strength of the farm lobby. The argument made, and which will be extended if farm price and income circumstances deteriorate compared with their 2008 levels, is that higher energy prices and related production costs render inadequate the safety net that was good enough, and indeed was lauded by many farm groups, from 2002 to 2006. Traditional price and income support levels that were raised only slightly in 2007 could be increased further in the future. Despite all of these considerations, the high world prices that in early 2008 were straining the global food system and prompting defensive policy reactions among exporters and importers worldwide had only modest effects on the commodity support provisions of the US Farm 4

The loan rate for raw cane sugar is to rise from US$ 0.18 per pound to US$ 0.1875 by 2012. The Secretary of Agriculture is required to set domestic marketing allotments at no less that 85 per cent of estimated quantities for domestic human consumption and to purchase sugar to produce biofuels if necessary to avoid forfeitures of sugar under the loan-rate price-support programme, thus insulating domestic producers from pressure of increased imports under trade agreements.

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Bill. There was no significant shift towards decoupled policy instruments as had occurred when prices rose sharply in 1995–1996, nor were there calls for an end to the permanent support legislation as had been articulated in the earlier debate. Still, the farm lobby did not avoid, at least for the time being, a projected squeeze-down of anticipated subsidy payments under the price-linked support programmes. Passing a bill proved difficult with high prices prevailing, as it had with the high prices in 1995–1996. In the end, the majorities assembled in Congress to enact this legislation, over a presidential veto that the administration made only half-hearted efforts to sustain, demonstrated the ability of the farm lobby to secure a continuation of support programmes that largely served the same purposes and benefited the same interest groups as did earlier legislation.

Nutrition and food aid Poverty and food insecurity are domestic policy issues in the US despite its high average real income, and international food aid has long been linked to Farm Bills and farm policy. Following the sharp increases of farm commodity prices in the winter and spring of 2008, these two aspects of the 2008 FCE Act merit attention, although space limitations preclude a full discussion here. The coalition of farm producers with advocates of food assistance to the poor has long been critical to enacting Farm Bills. But, interestingly, the approaches taken towards meeting the food needs of the domestic poor differ markedly from the approach taken towards international food aid. The US provides most domestic food assistance through its food stamp programme, renamed the Supplemental Nutrition Assistance Program (SNAP) in the FCE Act. Increased funding for this and other nutrition programmes became a critical part of the Farm Bill, as shown in Table 9.2. The changes implemented eased some of the eligibility criteria leading to higher projected spending (Johnson 2008). Moreover, this is a mandatory programme available to all applicants who meet the eligibility criteria. Thus, if the economy enters a recession, as it did in late 2008, then SNAP expenditures will rise relative to the projected baseline for the FCE Act even in the absence of any policy changes. International food aid is also extended in the FCE Act, particularly through the traditional P.L. 480 Title II programme that provides US commodities primarily for emergency relief and also for use or resale to support non-emergency development projects. The FCE Act authorises

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increased spending from an average of US$ 1.2 billion to US$ 2.5 billion annually for Title II, but since this is not a mandatory programme, actual expenditures will depend on future appropriations of funds by Congress. The provision of only US commodities is controversial in the WTO and also differs from the domestic SNAP in which the assistance provided (largely by electronic debit cards) can be used for a very broad array of food items without regard to whether they are domestically produced or imported.

Possible further WTO disciplines The historical record demonstrates very little pre-emptive movement of US policy to improve its consistency with the rules of the WTO. Under low prices, the 2002 FSRI Act simply included a clause authorising the Secretary of Agriculture to make adjustments to payments, if necessary to maintain US compliance. Whether this authority would be adequate to make significant changes to farm policy to comply with WTO payment limits has never been tested. The challenge launched by Brazil in 2003 against the US cotton programme under the WTO dispute settlement process led to slight changes in policy. The US eliminated the Step 2 payments made to processors of domestic cotton, modified some of the export credit guarantee programmes prohibited by the WTO and eliminated others, but did not change the basic cotton support programmes found to cause serious prejudice to Brazil’s interests. There has been little appetite in Congress for making other changes designed to reposition US programmes so that conflict with WTO agreements is minimised. In the 2008 FCE Act only a few modest steps were taken. The first such policy change creates new room for subsidies rather than a reduced level of support: the dairy programme was modified to apply price supports only to processed products (butter, cheese and non-fat dry milk) rather than fluid milk, potentially reducing substantially the dairy market price support (MPS) that would be reported in WTO notifications while having no real market effects. The payments compliance adjustment authority from the FSRI Act was extended, and authority was repealed for the GSM-103 export credit programme, the 1 per cent fee cap on the GSM-102 programme and the inactive Export Enhancement Program (EEP). Dispute cases brought by Canada and Brazil in 2007 raise the broad question of whether the US violated its total AMS commitment under the URAA during certain years (WTO 2007a, b). A primary issue, building

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on a judgment in the earlier cotton case, is whether fixed direct payments to farmers have been correctly notified as meeting the criteria of the green box or should be included in the AMS because they are made for base acreage on which production of fruits and vegetables is prohibited. A second issue concerns whether US countercyclical payments under the 2002 Farm Bill (and the earlier crop market-loss payments) should be classified as non-product-specific (NPS) support, as notified by the US. The alternative argument is that they should be considered productspecific payments, because they are inherently linked to specific commodity prices and because they also rest on the fruit and vegetable production exclusion. The outcomes of these dispute settlement cases will have implications both for the US and for other countries in terms of the manner in which certain policies are notified, whether domestic support is judged consistent with WTO obligations, and which policy reforms might be undertaken in the future.5 New Doha Round commitments might also constrain US farm programmes in terms of choices of instrument or subsidy levels. In a series of papers Blandford and co-authors have examined this possibility. Blandford and Orden (2008) take into account the provisions of the 2008 FCE Act (excluding possible ACRE payments), projections for future prices and production as of mid-2008, and the proposed modalities at the time of the suspension of Doha Round negotiations in July 2008 (WTO 2008). They conclude that if relatively high prices continue, the US would be able to adapt to the new WTO constraints with little change in its policies, with the possible exception of binding commodityspecific constraints for sugar (AMS) and cotton (blue box). The strengthened disciplines would squeeze down the leeway the US would have for providing support reported to the WTO as trade-distorting, but would still provide substantial flexibility. This outcome is illustrated in Figure 9.1. It shows projected blue box, AMS, and product-specific and non-product-specific de minimis expenditures for 2014. The sum is compared with the potential limit of nearly US$ 14.5 billion under a WTO constraint on overall trade-distorting support (OTDS) by showing a projected residual category of unused spending within the constraint. Projected blue box expenditures (countercyclical payments) are only US$ 0.5 billion, well under the modalities cap of US$ 4.8 billion. Likewise, 5

Were direct and countercyclical payments and their antecedents included in productspecific support notified in the US Current Total AMS, the US would have exceeded its AMS commitment in 1999, 2000, 2001, 2004 and 2005.

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0.5

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Blue Box Dairy AMS Sugar AMS Other AMS PS de minimis used NPS used OTDS "available"

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Figure 9.1. Projected composition of US notified support in 2014 and ‘available’ OTDS support (excluding ACRE payments), billion US dollars Source: Blandford and Orden (2008)

total AMS (excluding de minimis) is projected at US$ 3.5 billion, well under the proposed cap of US$ 7.6 billion. Product-specific de minimis is negligible and non-product-specific de minimis is projected at US$ 4.8 billion, largely due to higher projected expenditures on subsidised crop and revenue insurance at high prices. These projections and caps leave room for various additional OTDS expenditures of about US$ 5.4 billion. The latitude available partly reflects the redesign of the dairy support programme in the FCE Act, which reduces the dairy AMS that might be reported by as much as US$ 3.6 billion. The apparent ease of complying with new WTO constraints under relatively high commodity prices made it possible for the US administration to pursue a Doha Round agreement in mid-2008. Yet past experience with farm support legislation shows that any required adjustments would not be easy to make politically. Any pressure on the sugar programme would be resisted by the domestic industry and the stringent product-specific modalities proposed for cotton could pose a challenge. Moreover, the proposed large reductions in the OTDS and total AMS constrain the contingent room for manoeuvre for support that is most closely linked to prices. If the high-price environment of USDA’s 2008 projections does not materialise, the limit on the total AMS and additional product-specific AMS caps under the proposed Doha Round modalities could be exceeded by the US unless price-linked support programmes are modified or some other alternative to current support policies is adopted. This would be even more likely if many farmers were to opt for the ACRE programme. There is also the increasingly germane issue of how ethanol subsidies will be notified in the future. Some biofuel production subsidies were notified by the US in 2007 for the period 2002–2005 and these may

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increase under the FCE Act or other legislation. More significantly, the forgone revenue from the federal ethanol tax credit to fuel blenders and related state tax provisions could reach US$ 7–8 billion or more on cornbased ethanol. If these amounts were to be counted, the level of the AMS would be substantially higher.6

Future prospects A powerful farm lobby in the US continues to have the ability to gain support in the political arena. Both the FAIR Act in 1996 and the FCE Act in 2008 were framed under favourable market prices. Ending farm subsidies should have been easier in 2008 than in 1996 in a number of respects. Supply-control annual acreage set asides and high price supports had waned as an intervention strategy and farmers had benefited from planting flexibility through enhanced ability to shift acreage among crops in response to market opportunities. Buyouts of restrictive production quotas had occurred for two speciality crops (peanuts and tobacco). Net farm incomes were at record levels. Yet, with the possibly significant exception of the ACRE programme, which reverts to coupling potential payments to market prices and planting decisions, the structure of farm support policies was essentially unchanged by Congress in the 2008 Farm Bill. Specific subsequent events, such as the breakdown of global financial markets that occurred in late 2008, could not have been foreseen. But 6

The federal ethanol fuel blenders’ tax credit is currently notified to the WTO by the US as an industrial subsidy. However, ethanol itself is considered an agricultural product. Because ethanol policies affect corn prices, they could also be judged to be a ‘measure directed at processors’ that provides ‘benefit to the producers of the basic agricultural product’ and thus subject to inclusion in the AMS under Annex 3, number 7 ‘to the extent that such measures benefit producers of the basic agricultural product’. This would correspond to the way the US formerly notified Step 2 processor payments for cotton. It will be interesting to observe next how the US decides to report the new subsidies created in the FCE Act for processors of both domestic and imported cotton, to see whether an analogy between subsidies to cotton processors and tax credits to ethanol processors can continue to be drawn. Of course, if ethanol policies are justified on environmental grounds or are related to national security, they could be exempted from the AMS subsidy disciplines provided they meet the relevant criteria of the green box or GATT articles. The use of mandates versus tax credits raises the issue of which policy is judged a ‘measure’ subject to possible disciplines. As shown by de Gorter and Just (2007), when there is no binding mandate, the tax credit adds substantially to the level of production of ethanol, its price, and the price and output of corn. When there is a binding consumption mandate, the tax preference itself has no such effects. In this case, it is the binding mandate that affects ethanol and corn production and prices and would be the policy instrument to which WTO agricultural disciplines might apply.

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farm interests were clearly determined to retain their various support programmes in the FCE Act. Despite the ability of the farm lobby to retain its support programmes until 2012, there are several uncertainties about the alignments that have allowed US farm subsidies to endure. Expenditures for nutrition have come to dominate total expenditures in Farm Bills and are projected to increase their share further. Likewise, at least when prices are relatively high, spending on conservation and the environment becomes a substantial part of total expenditures on the production side of agriculture. Further realignment could occur in the coalitions needed for congressional passage of Farm Bills. Nutrition and environmental interests might at some stage decide that their issues could be better served outside the context of the Farm Bill. At a minimum the traditional farm lobby could find itself no longer the dominant partner in the broader coalition that has secured the enactment of Farm Bills, but instead in a supporting position within a coalition dominated by other interests. Yet there are few hints of any related decline in the influence of the farm lobby in the protracted debate over the 2008 FCE Act. That fixed direct payments became a critical focus of domestic controversy in a high-price environment is also indicative that there may be a limit to the power of the farm lobby, though again that limit proved largely ineffective in 2008. The international disciplines that allow unrestricted decoupled income payments in the WTO green box provide room for this domestic debate, but acrimony over the fixed direct payments in the US makes them unattractive to farm groups and their representatives, who seek to minimise controversy over the support provided. This outcome suggests that decoupled income support payments may prove less useful than intended for fostering international coordination to reduce trade-distorting subsidies. The URAA disciplines have played little part in the post-Uruguay Round decisions on US farm policy. Under high prices, the US is likely to be able to stay within the tighter limits on support if there is eventually a Doha Round agreement. These considerations do not diminish the value of potential new subsidy constraints through the WTO. But the latitude allowed by the Doha Round disciplines proposed in 2008 illustrates the substantial distance still to be covered to achieve a more liberalised rules-based global trade system for agriculture. Even so, some combination of lower world prices, adverse WTO dispute settlement rulings on the notification of support in the green box, inclusion of ethanol subsidies in notified agricultural support, or a Doha Round

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agreement that reduced the AMS cap and bound the OTDS and blue box for the first time could lead to problems of WTO domestic support compliance for the US. In that case, the next Farm Bill could be framed under a very different set of circumstances. The deepening entrenchment of the domestic ethanol sector during the oil-price boom of the mid-2000s both demonstrates the continued political strength of the agricultural lobby and constitutes a substantial intervention coupled to production. In addition, restrictive land-use policy was never completely abandoned – the CRP has always had a substantial supply-reducing intention and effect. If biofuel demand persists under ethanol mandates and subsidies, spending on conservation may decline as farmers voluntarily abandon the CRP. This would shift the political balance within Farm Bill deliberations back towards the commodity lobby, but it could also provoke a break in the political alliance that forged the 2008 Farm Bill.7 A Doha Round that agreed on OTDS, tighter total and productspecific AMS, and new blue box total and product-specific limits would be a valuable check in the event that traditional US programmes are ratcheted up or agricultural prices return to the downward trend that has characterised most of the past half century. In such circumstances, an option for US policymakers would be to expand green box support for farmers under the environmental category, disaster relief, or direct payments that are modified if necessary to meet any WTO challenges. If US policy inches towards instruments with greater emphasis on energy crops, disaster assistance, crop and revenue insurance, and environmental programmes on working lands, scrutiny for consistency with the green box will be an essential bulwark against new forms of productionand trade-distorting programmes. But as policy stood in mid-2008, it is unlikely that the WTO will affect ethanol tax credits and mandates or long-term land idling under the CRP. These instruments, largely outside WTO disciplines, were working to drive agricultural prices up in 2008 and arguably have become, along with other environmental payments and crop and revenue insurance subsidies, the most important elements 7

With the sharp rise in prices in mid-2008 the Secretary of Agriculture used his authority to allow haymaking and grazing on some CRP land, which was opposed by the National Wildlife Federation and other environmentalists who sought a court injunction to overturn the decision. He also considered but decided against authorising an early release of CRP acreage without payment penalties. The CRP contracts for over 5 million acres that are scheduled to expire during 2008 or 2009 had not been renewed by July 2008 and this land could return to production (Harris et al. 2008).

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of US farm policy. The boom-related optimism in the agricultural sector arose in early 2008 in part because augmentation of demand through ‘food, fiber and fuel’ reinforced environmentally rationalised supply control as a mechanism for keeping farm commodity prices higher than they would otherwise be. The WTO has little ability to limit these distortions. All of these considerations are relevant in a world economy that has been shaken within the single year 2008 by both a sharp commodity price boom, which caused great initial anxiety about food supplies and affordability, and a larger global financial crisis, that as one consequence dampened the commodity price boom but also slowed economic growth and raised fears of a deep worldwide recession. Some US support policies tend to drive world market farm commodity prices down – such as its domestic price support payments, countercyclical payments, and to a lesser extent even fixed direct payments. These effects have been the concern of developing countries that are competing exporters or that blame low world prices for undermining long-term investments in their own agricultural sectors. But other US policies have the offsetting effect of reducing US production or raising demand for basic crops such as corn. These policies, in contrast, come under sharper scrutiny when world food prices increase and low-income food-importing countries face difficulties. The 2008 FCE Act did little to lessen these conflicting policy impacts. Based on this Act, an end to farm programmes that distort agricultural production incentives cannot be anticipated in the US in the foreseeable future. This leaves an ongoing policy challenge to make US farm support policies more benign and consistent with economic liberalism and real environmental progress.

References Arha, Kaush, Josling, Tim, Sumner, Daniel A. and Thompson, Barton (eds.) 2007. US Agricultural Policy and the 2007 Farm Bill. Stanford, California: Woods Institute for the Environment, Stanford University. Babcock, Bruce 2008, ‘Statement before the US Senate Committee on Homeland Security and Government Affairs’, Presented at the Hearing on Fuel Subsidies and Impact on Food Prices, 7 May. Blandford, David, Laborde, David and Martin, Will 2008. ‘Implications for the United States of the May 2008 Draft Agricultural Modalities’, Washington, DC: International Centre for Trade and Sustainable Development, the International Food and Agricultural Trade Policy Council and the International Food Policy Research Institute (www.ifpri.org/pubs/cp/ictsd_WTOpapers.asp).

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Blandford, David and Josling, Tim 2008. ‘The WTO July 10th Agricultural Modalities Proposals and their Impact on Domestic Support in the EU and the US’, Paper prepared for the World Bank. Blandford, David and Orden, David 2008. ‘United States: Shadow WTO Agricultural Domestic Support Notifications’, Discussion Paper 821. Washington, DC: International Food Policy Research Institute. Brasher, Philip 2008. ‘Farm Bill’s Potential Cost “Off the Charts”’, Des Moines Register, 16 May. Chite, Ralph 2007. ‘Farm Bill Budget and Costs: 2002 vs. 2007’, RS22694. Congressional Research Service, 7 November. Committee on Agriculture, US House of Representatives 2008. ‘Joint Explanatory Statement of the Committee of Conference, Food, Conservation, and Energy Act of 2008 (H. R. 2419)’ (www.agriculture.house.gov/inside/2007FarmBill. html). Congressional Budget Office 2008a. ‘CBO March 2008 Baseline for CCC and FCIC’, prepared by Dave Hull, Jim Langley and Greg Hitz (www.cbo.gov). –––2008b. ‘Estimated Effects on Spending and Revenue of the Conference Agreement for H. R. 2419, the Food, Conservation and Energy Act of 2008’ (www.cbo.gov). de Gorter, Harry and Just, David R. 2007. ‘The Law of Unintended Consequences: How the US Biofuel Tax Credit with a Mandate Subsidizes Oil Consumption and has no Impact on Ethanol Consumption’, Department of Applied Economics and Management Working Paper No. 2007–20, Cornell University (updated February 2008) (www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1024525). FAPRI 2008. ‘Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options’, FAPRI-MU Report No.06–08, June. Gardner, Bruce 2009. ‘Distortions to Agricultural Incentives in the United States and Canada’, in Anderson, Kym (ed.), Distortions to Agricultural Incentives: A Global Perspective 1955 to 2007. London: Palgrave Macmillan and Washington, DC: World Bank (forthcoming). Harris, Wes, Lubben, Brad, Novak, James and Sanders, Larry 2008. ‘The Food, Conservation and Energy Act of 2008: Summary and Possible Consequences’, DAERS-WP-1–7 2008. Prepared for the Extension National Farm Bill Train the Trainer Conference, Kansas City, Missouri, 8–9 July. Johnson, Renee (coordinator) 2008. ‘Farm Bill Legislative Action in the 110th Congress’, RL33934, Congressional Research Service, 19 June. Josling, Tim 2007. ‘The Impact of the WTO and Bilateral Trade Agreements on US Farm Policy’, in Gardner, Bruce and Sumner, Daniel A. (eds.), Agricultural Policy for the 2007 Farm Bill and Beyond. Washington, DC: American Enterprise Institute. Josling, Timothy E., Tangermann, Stefan and Warley, Thorald K. 1996. Agriculture in the GATT. London and New York: Macmillan.

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OECD 2005. A Review of Empirical Studies of the Acreage and Production Responses to US Production Flexibility Contract Payments. Paris: Organization for Economic Cooperation and Development (AGR/CA/APM(2004)21/Final, 30 March). Orden, David, Blandford, David and Josling, Timothy 2009. ‘Determinants of Farm Policies in the United States, 1996–2008’, in Anderson, Kym (ed.), Political Economy of Distortions to Agricultural Incentives. London: Palgrave Macmillan and Washington, DC: World Bank (forthcoming). Orden, David, Paarlberg, Robert and Roe, Terry 1999. Policy Reform in American Agriculture: Analysis and Prognosis. Chicago: University of Chicago Press. Tyner, Wallace 2007. ‘US Ethanol Policy – Possibilities for the Future’, Bioenergy, Purdue Extension ID-342-W, January. US Department of Agriculture 2008a. USDA Agricultural Projections to 2017. Washington, DC: Office of the Chief Economist, World Agricultural Outlook Board (Long-term Projections Report OCE-2008–1). –––2008b. ‘Charts Showing Budget Exposure from the ACRE Revenue Support’, Washington, DC: Office of the Chief Economist. WTO 2005. United States – Subsidies on Upland Cotton. Geneva: World Trade Organization, Reports of the Appellate Body, WT/DS265/AB/R, WT/ DS266/AB/R, and WT/DS267/AB/R, 21 March. –––2007a. United States – Domestic Support and Export Credit Guarantees for Agricultural Products, Request for the Establishment of a Panel by Brazil. Geneva: World Trade Organization, WT/DS365/13, 9 November. –––2007b. United States – Subsidies and Other Domestic Support for Corn and Other Agricultural Products, Request for the Establishment of a Panel by Canada. Geneva: World Trade Organization, WT/DS357/12, 9 November. –––2008. Revised Draft Modalities for Agriculture. Geneva: World Trade Organization, Committee on Agriculture, Special Session, TN/AG/W/4/Rev. 3, 10 July. Zulauf, Carl 2008. ‘2008 Farm Bill with Focus on ACRE and SURE’, Ohio State University, 28 August (www.aede.osu.edu/people/publications. php?user=zulauf.1).

10 Impact of the food crisis on developing countries and implications for agricultural trade policy michael herrmann and ralf h. peters* Introduction The recent hike in international commodity prices has had considerable effects on developing countries. Many poor countries find themselves in the somewhat paradoxical situation that a large share of their population not only depends on imported food, but is also directly dependent on the production of agricultural goods at home. Many developing countries, including many least-developed countries in Africa, are thus affected by the recent food price hikes as both consumers and producers. Even adjusted for inflation and the depreciation of the dollar, the price increases during recent years have been remarkable. Over the 2002–2007 period, non-oil prices increased by 113 per cent in dollar terms and by no less than 80 per cent denominated in special drawing rights. The rise in the price of oil has also encouraged an increasing demand for biofuels and, associated with this, an increase in prices of other commodities. To a lesser extent, commodity prices have also increased because of supply shortages resulting from droughts. These recent events have added to a gradual tightening of fundamentals in the commodity markets, which is attributable to a relatively high rate of global population growth, increasing demand in emerging markets, changing diet in emerging countries, and a weak agricultural sector in many developing countries. The graphs in Figure 10.1 show that none of the products under consideration has been affected by a sudden and very large change in * Michael Herrmann, Economist, United Nations Conference on Trade and Development (UNCTAD), Geneva, Switzerland. Ralf H. Peters, Economist, UNCTAD, Geneva, Switzerland. The authors would like to thank Samuel Gayi, Baris Karapinar and participants of the World Trade Forum 2008 at the WTI for helpful comments. The views expressed in this chapter, however, do not necessarily reflect those of commentators or the UNCTAD Secretariat with which the authors are affiliated.

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Figure 10.1. World cereal consumption, production, stocks and prices Source: UNCTAD 2008a: 32

fundamentals. During the past few years consumption has been rising, but so has production, and stocks have eroded only slowly. However, it seems these changes alone cannot satisfactorily explain the price hikes in 2007, and the spike in mid-2008. It therefore seems that an increase in speculation has contributed to an inflation of commodity prices (UNCTAD 2008a). Since August 2008, however, commodity prices have fallen significantly. The downward adjustment of commodity prices is largely attributable to the fact that the global financial crisis has resulted in a considerable slowdown of the world economy, and this in turn has led to a decline in demand for commodities and adjusted expectations about future commodity prices. However, several emerging market economies, particularly China and India, are projected to maintain relatively high economic growth and a correspondingly large demand for primary commodities.

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At the same time, many commodity-rich economies, particularly in Africa, face considerable supply constraints which prevent them from quickly and significantly increasing the supply of commodities. In short, while the commodity price peak has probably been reached, the commodity price boom has not yet ended. Although it is difficult to accurately forecast commodity prices (Deaton and Miller 1996), many commodity prices are likely to remain elevated compared with historical trends, and especially bust phases (David and Herrmann 2002). It is therefore important to ask what the current commodity price hikes, especially the food price hikes, imply for developing countries. In this chapter, we analyse the economic implications of high commodity prices for developing countries, and emphasise that the effects of higher commodity prices on developing countries vary considerably depending on their economic specificities, particularly their trade structures, their productive capacities, and the purchasing power of their exports. Surprisingly, the analysis highlights that many commodity exporters have not benefited, and that many commodity importers have not lost, as much as one might have expected because of the commodity price boom. The ultimate effects however depend not only on whether countries are currently producers or consumers of commodities, but also on the productive potential of countries in the medium and long run. While the majority of households are likely to lose in the short term they may benefit from higher prices due to production and employment effects in the medium term. Short-term losses however have serious implications as they can prevent countries from making the necessary progress towards the Millennium Development Goals (UNCTAD 2008b; South Centre 2008). Indeed, some of the progress towards poverty reduction objectives has already been undone. As efforts to stabilise commodity prices at the international level appear unattainable, efforts to secure against commodity price shocks become important. And while it is a considerable challenge for poor countries, the most promising strategy for decreasing exposure to commodity price shocks remains the diversification of the economy and export baskets. To this end, it is important that commodity-rich countries that are benefiting from relatively high commodity prices make good use of windfall profits. Bilateral and multilateral donors however must also strengthen their support of the efforts of developing countries to improve their productive capacities and promote economic diversification. Finally, efforts at the national level must be complemented by efforts at the international level. Trade negotiations on agricultural

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policies can have far-reaching implications for both commodity prices and food security.

Economic effects Developing countries are not a homogeneous group; some are commodity exporters, others are commodity importers; some are low-income countries, others are middle-income countries; and some have weak productive capacities, while others are rapidly developing their economic capacities. The impact of commodity price hikes on developing countries is as diverse as the developing countries themselves. It depends on current specialisation of developing countries in production and trade, as well as on potential specialisation of developing countries in the future.

Trade patterns The immediate effect of elevated commodity prices on a particular country depends on whether the country is a net importer or a net exporter of commodities. While many of the poorest developing countries were once net exporters of food, most of them have become net importers of food during recent decades. There are a number of reasons for this reversal, including a relatively high rate of population growth in developing countries combined with underinvestment in the agricultural sector in developing countries, and far-reaching support measures for the agricultural sector in developed countries, which will be discussed in more detail below. In 1988, Africa became a net food importer, and Table 10.1 shows that in recent years African countries have further increased their food imports.1 While it is less surprising that more advanced economies, which have a relatively strong specialisation in the manufacturing and services sector, have a negative trade balance in food, the table shows that many poorer economies, which have a relatively strong specialisation in the agricultural sector, also have a negative trade balance in food. Although the least-developed countries have a relatively large share of their labour force in agriculture and although agriculture accounts for a relatively large share of their total value added, they have a relatively large and increasing deficit in food trade. Between 1995–1996 and 2005–2006, the latest years for which reliable data was available at the time of writing, the 1

Estimate based on UN Comtrade data.

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Table 10.1. Net trade balance in selected product groups and for selected country groups, 1995–1996 and 2005–2006 (billion US$, current) Change between 1995–1996 2005–2006 periods Developed economies Transition economies Developing economies Africa Americas Asia East Asia Southeast Asia South Asia West Asia Least-developed countries Agricultural Developed economies raw materials Transition economies Developing economies Africa Americas Asia East Asia Southeast Asia South Asia West Asia Least-developed countries Ores and metals Developed economies Transition economies Developing economies Africa Americas Asia East Asia Southeast Asia South Asia West Asia Least-developed countries

Food

−20.7 −8.6 17.8 −4.0 28.2 −6.6 −9.8 11.9 0.1 −8.7 −2.2 −11.6 5.1 −7.5 2.0 2.4 −12.3 −13.2 4.3 −1.0 −2.2 1.6 −29.3 8.6 −4.0 9.1 16.7 −31.3 −21.6 −5.5 −1.7 −2.6 3.6

−53.5 −15.5 40.2 −8.5 57.5 −8.5 −17.0 20.9 2.3 −14.7 −6.7 −5.0 7.3 −14.4 2.7 4.8 −22.4 −26.0 9.9 −2.6 −3.8 2.0 −40.0 23.9 −16.0 28.2 55.4 −101.6 −72.0 −6.7 −11.2 −11.8 9.5

−32.8 −6.9 22.5 −4.4 29.3 −2.0 −7.2 9.0 2.2 −6.0 −4.5 6.6 2.3 −7.0 0.7 2.4 −10.1 −12.7 5.7 −1.5 −1.5 0.4 −10.7 15.3 −12.0 19.1 38.7 −70.3 −50.4 −1.2 −9.5 −9.2 5.9

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Table 10.1. (cont.) Change between 1995–1996 2005–2006 periods Fuel

Manufactures

Developed economies −160.3 Transition economies 26.7 Developing economies 123.6 Africa 34.0 Americas 19.8 Asia 69.8 East Asia −28.6 Southeast Asia 6.3 South Asia 4.9 West Asia 87.2 Least-developed countries 3.9 Developed economies 194.9 Transition economies −6.5 Developing economies −189.4 Africa −55.2 Americas −76.8 Asia −54.4 East Asia 63.6 Southeast Asia −50.4 South Asia −8.0 West Asia −59.5 Least-developed countries −19.1

−628.3 179.8 409.0 145.7 71.7 192.6 −149.1 −4.2 −2.2 348.1 32.3 −100.0 −79.0 83.6 −116.4 −130.5 334.4 424.9 59.3 −22.7 −127.2 −41.3

−468.0 153.1 285.4 111.7 51.9 122.8 −120.5 −10.5 −7.1 260.9 28.4 −294.9 −72.5 273.0 −61.3 −53.7 388.7 361.4 109.7 −14.7 −67.7 −22.2

Source: Authors’ calculations, based on UN Comtrade data.

net trade balance in food of least-developed countries deteriorated by no less than US$ 4.5 billion, and the net trade balance in food of African countries worsened by US$ 4.4 billion over the same period. As the food price index between these two periods remained almost unchanged, the increase of the food import bill is almost exclusively attributable to an increase of food import volumes. However, the increase of the food import bill since 2007 is most certainly also attributable to an increase in international food prices.2 2

Estimates based UNCTAD Commodity Price Bulletin.

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Like many African countries, many countries in the Americas are rich in resources, but unlike the former, many countries in the Americas are able to feed themselves. The relatively high and rising food imports by Asian economies are largely attributable to Western Asian countries, which more than balance the increase of food imports through a comparatively high increase of fuel exports, and East Asian economies, which compensate for the increase of food imports with an over-proportionate increase in exports of manufactures. East Asian economies, especially China, have also considerably increased imports of other agricultural goods, mining products and fuel. Between 1995–1996 and 2005–2006, the commodity trade balance of these countries deteriorated by about US$ 191 billion, reaching US$ 264 billion. However, over the same period, their manufactures trade balance improved by US$ 361 billion, reaching US$ 425 billion. The effects of commodity price hikes on countries, in short, depend not only on their current trade structures, but also on their capacity to compensate for an increase in food imports on the one side, through an increase in their exports on the other. This is also highlighted by the developments of and differences between the barter terms of trade and the income terms of trade.

Terms of trade The barter terms of trade are determined here as the relative price of commodities to manufactured goods. The historical trend in the barter terms of trade shows a decline, implying that the price of commodities is falling, whereas the price of manufactures is increasing in relation. Historically the developing world has exported commodities, whereas the developed world has exported manufactures. A decline of the barter terms of trade was therefore bad for developing countries and good for developed countries. But this simple picture is increasingly being distorted by two factors. Rapidly growing demand for commodities from rapidly growing economies in Asia, particularly China, has led to a rising price for commodities, while a rapidly increasing supply of manufactures by the very same economies in Asia has led to a falling price of many manufactures. The first factor that distorts the picture is thus an increase, rather than a decrease, in the barter terms of trade. The second factor that distorts the picture is that many developing countries have become exporters of manufactures rather than commodities (see Table 10.1 above). The developing countries are no longer a homogeneous group, if they ever were.

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Newly industrialising countries, particularly in east and south Asia have become net exporters of manufactures and net importers of commodities. However, many of the least-developed countries, particularly in Africa, continue to be net exporters of commodities and net importers of manufactures. Because of these developments in the trade structures of developing countries, the changes in terms of trade will have diverse effects. The two panels in Figure 10.2 show that developing countries which diversified their economies and export manufactures are witnessing a deterioration of their terms of trade, whereas countries that have failed to diversify their economies and continue to export oil and mining products or selected agricultural produce benefit from improving terms of trade. While these developments are in principle bad for countries in east and south Asia, and good for countries in Africa or west Asia, the costs on the one side and the benefits on the other may not be as large as expected. Figure 10.3 compares the changes in the terms of trade, as well as changes in export volumes, and the resulting changes in the purchasing power of exports for the different country groups. East and south Asian economies have been able to compensate for the lower unit value of exports through a major increase in the volume of exports. As a result of strong supply capacities, they have witnessed a very large increase of the purchasing power of their exports, which allows these countries to finance necessary imports and stimulate domestic economic growth. By contrast, the terms of trade of African economies have improved. But even though these countries are benefiting from a rising unit value of their exports they have not been able to significantly increase the volume of exports. As a result, they have seen a relatively small increase of the purchasing power of their exports. In short, because of the significant changes in trade structures of developing countries, changes in the barter terms of trade do not have homogeneous effects on these countries. Advanced developing countries, such as China, are hardest hit by the current changes in the terms of trade, but at the same time these countries have very strong production capacities which allow them to compensate for the deterioration in the terms of trade. The least-developed countries, particularly in Africa, benefit from the improvement in the terms of trade, but because of weak supply capacities they cannot fully seize the opportunity offered by high commodity prices. What are the implications for food security in the different countries? Most advanced developing countries which are net food importers should have sufficient foreign exchange to finance an increased food import bill, but many low-income developing countries which are net food importers

A. By trade structurea

B. By geographical area

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60 2000 2001 2002 2003 2004 2005 2006 2007 Oil exporters Exporters of minerals and mining products Exporters of agricultural products Exporters of manufactures Net food importers

2000 2001 2002 2003 2004 2005 2006 2007 Africa Latin America and the Caribbean East and South Asia West Asia Transition economies Developed economies

Figure 10.2. Net barter terms of trade, selected countries, 2000–2007 Note: Net food importers are low-income food-deficit countries, excluding exporters of fuel, minerals and mining products. a Developing countries and transition economies. Source: UNCTAD 2008a: 28

impact on developing countries A. East and South Asia 1800 1700

B. Latin America 190

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0 60 1980 1984 1988 1992 1996 2000 2004

Figure 10.3. Terms of trade, export volumes and purchasing power of exports, 1980–2004 Source: UNCTAD 2005a: 93

may become unable to cope with a rising food import bill and to avoid a food crisis. Even exporters of food items have to confront a food crisis at home, as food products become too expensive for domestic consumers and are exported to foreign countries. In short, how changes in commodity prices affect different regions and countries is one thing, how they affect different groups within countries is an entirely different matter.

Short-term versus medium-term effects Changes in world commodity prices have a distribution impact between and within countries. Martin and Ivanic (Chapter 2 of this volume) focus on the distribution impact of rising prices among groups within countries by analysing household data. In the short term, net sellers benefit from higher prices while net buyers lose. Even in rural areas, the majority of households are net buyers of food, and an increase in food price therefore results in increased poverty incidence. A key question is

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how best to cope with these negative effects in both the short term and the medium term. This question is discussed in more detail below. While these negative effects of food price increases are already apparent, there are possible positive effects of food price increases that have not yet taken hold. A likely medium-term effect, when supply is more flexible, is that developing countries which are currently net importers of commodities may begin to revive their commodity production, provided that the increase of the international food price trickles down into an increase in farm gate prices. Whether farm gate prices increase in response and in proportion to increases in international food prices, critically depends on competition in the specific markets. In markets that are dominated by a few large intermediate or retail companies, on the one side, and many fragmented and uncoordinated suppliers, on the other, even a substantial increase in international food prices may result in only a small increase in the farm gate price. It is however important to complement any static short-term analysis by an analysis of dynamic effects, which takes into consideration the medium term. An expansion of agricultural production is likely to lead to more and more productive employment in the agricultural sector. Workers are not only expected to benefit from an expansion of employment and increased wages in the agricultural sector, but also from an expansion of employment and increased wages in the off-farm sector in rural areas. The off-farm sector provides essential inputs to and services for the agricultural sector, and is engaged in the processing of outputs produced by the agricultural sector (Aksoy and Izik-Dikmelik 2007; Hertel et al. 2004). As highlighted by classical dual-economy (Lewis 1954; Fei and Ranis 1964), as well as more recent ‘dual-dual economy models’ (Khan and Thorbecke 1988; Stifel and Thorbecke 2003; Herrmann and Khan 2008), an expansion of the agricultural and rural areas is also an important stepping stone towards the development of non-agricultural sectors, especially manufacturing and services. Herrmann (2007) examines a sample of 171 countries and concludes that at least 24 of these countries, including no less than 19 leastdeveloped countries (LDCs), have a strong but underutilised potential in agricultural production. They have a relatively large share of agriculture in GDP, a relatively large share of the population working on agricultural land, and a relatively large share of agricultural land in terms of total land area, yet these countries are often food insecure. The reasons for the low agricultural output of these countries, which makes them particularly vulnerable to spells of food insecurity, is a very

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low level of productivity. For most crops, LDCs have considerably lower yields than more advanced developing countries. In addition, LDCs have considerably lower agricultural labour productivity than other developing countries (Hermann and Khan 2008). Agricultural labour productivity in LDCs was just 46 per cent of the level in other developing countries and below 1 per cent of the level in developed countries. Labour productivity grew by only 18 per cent in LDCs between 1983 and 2003, by 41 per cent in other developing countries and 62 per cent in developed countries. In many cases agricultural labour productivity today is lower than it was half a century ago (UNCTAD 2006). The persistent agricultural underdevelopment or premature deagrarianisation that can be observed in many LDCs, especially in Africa, is due not only to underinvestment in agricultural development, but also to an unbalanced liberalisation in agricultural markets, as will be discussed below. As things stand, many developing countries, including LDCs, have considerable potential to increase their agricultural productivity, provided that they, and their development partners, increase investment in the agricultural sector (Cline 2004; Herrmann 2007). In poor countries there is a very large potential to increase agricultural productivity through an expansion of extension services and agricultural banking, better access to fertilisers and technologies, and the development of more efficient irrigation systems and rural transport networks. The technologies that matter for an increase of agricultural productivity in the poorest countries, in short, are tractors and ploughs, and not necessarily genetically manipulated plant varieties. While it is evident that the development of the agricultural sector is essential, among other reasons, for a sustainable reduction of poverty, the development of the agricultural sector does not yet receive adequate attention in many poverty reduction strategy papers. Nor does it receive adequate support from public donors. In the period 2003–2005, the Development Assistance Committee of the Organisation for Economic Co-operation and Development (OECD/DAC) committed only about 1.0 per cent of their total aid to the LDCs for agricultural research, extension, education and training (UNCTAD 2007: 168). Aid has not only neglected agriculture, but also economic development in general. Between 2000–2004 and 2006, aid committed by OECD/ DAC countries for the development of the social sector and governance in the LDCs increased from 34 to 42 per cent of total Official Development Assistance (ODA) commitments (disbursements accounted for 41 per cent in 2006), whereas aid committed by OECD/DAC countries for

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the development of economic infrastructure and production in the LDCs fell from 29 to 18 per cent of total ODA commitments (disbursements accounted for only 13 per cent in 2006) (UNCTAD 2008c: 31). This situation is particularly problematic as the LDCs are more in need of this type of aid than more advanced developing countries. A major rebalancing of development assistance to LDCs is necessary in order to enable them to develop productive capacities, diversify their economies, and decrease their exposure to commodity price shocks, as well as to food insecurity. The commodity price boom offers an important opportunity to developing countries, which have an actual or potential comparative advantage in producing and exporting commodities, to increase investment in their commodity sectors, including the agricultural sector. The focus on poverty reduction as well as the interest in biofuels provides additional impetus for the development of the agricultural sectors. A number of private foundations have already begun to place a stronger focus on agricultural development, including the Gates, Rockefeller, Clinton and Hunter foundations.

Policy challenges National and international policies need to address the challenges posed by high and volatile food prices. While commodity agreements could help to stabilise commodity prices to the benefit of both commodityexporting and commodity-importing countries, commodity agreements have a disappointing record and lack the necessary support. In the absence of an effective mechanism to stabilise commodity prices, countries will need to seek ways to insure themselves against price instability. Essentially, this requires considerable investment in the development of productive capacities, which is a precondition for the diversification of economies and export baskets. But it also requires that the rules of the multilateral trading system be rationalised and that developing countries are provided with enough space to pursue growth-oriented macroeconomic policies and promote their industries.

The promise of commodity agreements Commodity prices, which tend to be considerably more volatile than manufactures prices, both in relative and in absolute terms, pose a formidable challenge to both commodity exporters and importers. Whereas commodity-exporting countries suffer from unstable export

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revenues and growth rates, commodity-importing countries may face a sudden and large upward push on prices. While the development literature has placed a considerable emphasis on the former type of challenge, the current situation highlights that the latter type of challenges are also considerable. An increase in the price of essential commodities results in an elevated price level across economies and if this elevated price level triggers higher wages for workers, commodity prices can indeed result in high inflation, as was the case during the previous oil crisis. While the commodity price hikes since about 2003 have been much less likely to trigger a price–wage spiral and high inflation than the oil price hikes in the 1970s – because this time around wage increases typically remain below inflation rates, ensuring moderate or even declining unit labour costs – many central banks of commodityimporting countries have nonetheless tightened their monetary policy, and have accepted slower economic growth as a possible consequence (UNCTAD 2008a). Since the economic cost of volatile commodity prices is high not only for commodity-exporting countries, but also for importing countries, efforts to stabilise such prices within a predefined band width appear reasonable. UNCTAD was one of the agencies that led efforts to stabilise international commodity prices through various types of commodity agreements, but in the 1980s and 1990s it became abundantly clear that international commodity agreements have rarely lived up to expectations. There are several reasons for the failure of international commodity agreements, not least a relatively great incentive for free-riding by individual commodity-exporting countries. Although efforts to stabilise commodity prices are desirable from the perspective of both exporting and importing countries, and both developing and developed countries, history has provided ample evidence that international commodity arrangements have not successfully achieved this particular objective. As most efforts to stabilise commodity prices at the international level have not been very successful, efforts to secure against commodity price shocks have become more important. Just as exporters of commodities may insure themselves against unexpected and large falls in commodity prices, importers of commodities may insure themselves against unexpected and large rises in commodity prices. However, small producers, especially in developing countries, are typically unable to obtain such insurance, and the current situation shows that no economic actor in any country can completely eliminate the risk of large swings in commodity prices. While rich countries may bear these risks and the associated costs,

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poor countries may be unable to cope with the risks and subsequently be confronted by major economic recessions. Poor countries must therefore seek ways to stabilise their incomes in the light of unstable commodity prices, which go beyond reliance on various insurance schemes. The best way to do so is through the diversification of income sources; that is the diversification of economic activities.

The importance of diversification Today, African countries have the highest rates of economic growth for decades, and these are largely due to exceptionally high commodity prices. The problem however is not that poor countries never have high economic growth, but rather that they are typically unable to sustain it, and therefore tend to fall further behind instead of catching up with other countries (Cerra and Saxena 2005). The volatility of growth rates of poor countries tends to be closely associated with the volatility of commodity prices. The policy challenge for many African countries, as well as for other commodity-rich countries, is how they can maximise their benefits from the current commodity price boom, and secure themselves against a possible future commodity price collapse. To these ends, it is important that commodity-rich countries make good use of windfall profits. The increase of commodity prices could help governments to raise their revenues, and increase investment in productive activities. These are not automatic processes however. Productive public investments can be undermined for two reasons: they are undermined by the fact that some governments are corrupt or incapable and therefore do not make good use of their windfall profits. This issue has received considerable attention in the public discourse. But productive public investments are also undermined by the fact that many governments receive only a very small share of mineral revenues. This is discussed in more detail below. Changing terms of trade have contributed to higher rates of economic growth in many countries that export oil and gas, as well as in countries that export minerals and metals. However, in some countries, a relatively large share of the gains goes to the foreign residents who own oil and mining companies and is transferred to their home countries. As a result, the gross effects of changing terms of trade on the disposable income of countries are typically considerably lower than the net effects of changing terms of trade (Table 10.2, see also UNCTAD 2005a).

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Table 10.2. Average change of terms of trade and effects, 2004–2006 (per cent of GDP)

Exporters of oil and gas Algeria Angola Azerbaijan Bolivia Equatorial Guinea Iran, Islamic Republic of Kazakhstan Kuwait Nigeria Russian Federation Saudi Arabia Venezuela, Bolivarian Republic of Exporters of minerals and mining products Botswana Chile Peru Zambia Exporters of agricultural products Exporters of manufactures

Terms of trade

Net income payments

Natl. disposable income

7.5 4.6 16.4 9.3 2.6 18.7 3.9 8.6 10.2 5.5 4.3 9.5 7.1

−2.0 0.0 −3.9 −7.1 0.2 −11.6 0.6 −4.9 2.4 −3.3 −0.5 0.6 1.0

5.5 4.6 12.5 2.2 2.9 7.1 4.5 3.6 12.6 2.2 3.8 10.0 8.1

3.9

−2.1

1.8

−0.8 6.3 2.7 6.5 −0.2

−0.3 −3.7 −2.1 −4.0 −0.1

−1.1 2.5 0.6 2.5 −0.4

−0.6

−0.1

−0.7

Source: UNCTAD 2008a: 30

To ensure that developing countries are in a position to finance necessary public investments it is therefore not only desirable that the governments make better use of their rents, but that these countries also receive a larger share of rents in the first place. Otherwise, even commodity-rich countries, that seemingly benefit from a commodity price boom, may in fact remain financially constrained countries that continue to depend heavily on development assistance. The cases of Botswana and Chile, which receive higher shares of mineral rents, highlight the positive impact of a more active policy.

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While high commodity prices encourage the private sector to increase investment in the commodity sector, which increases the specialisation of developing countries, high commodity prices discourage the private sector from stepping up investment in other sectors and thereby promoting the diversification of developing countries, which is essential to reduce their exposure to future commodity price shocks. In order to promote more investment and especially more investment in new areas, the public sector must more actively support the private sector. This requires the creation of business-support institutions, which support the upgrading of technologies and skills, and the joint processing and marketing of products, as well as the promotion of stronger financial institutions, which not only provide larger volumes of credit but also more appropriate forms of credit. While micro-finance institutions may fill certain gaps in the financial market, they are often unable to provide appropriate forms of credit for medium and large enterprises, namely relatively large loans for relatively long durations at relatively low interest rates. In the absence of commercial banks that can provide the necessary loans, developing countries may seek to provide such loans through publicly owned development banks (UNCTAD 2008a). To avoid repeating the past mistakes of development banks, it is necessary to ensure that such banks select investment projects more carefully. Projects must be selected on the basis of a transparent and rigorous analysis, and the development banks must have a clear business plan, which defines the terms and objectives of any financial engagement.

The effect of past trade liberalisation Agricultural trade liberalisation is either a unilateral decision or a result of a regional or multilateral trade agreement. Many developing countries, especially LDCs, have undertaken unilateral trade liberalisation, although this trade liberalisation has been encouraged by structural adjustment programmes of the international financial institutions. Structural adjustment programmes have undermined the functioning of development banks and special agricultural banks, and have encouraged the dismantling of extension services, marketing boards and ‘caisses de stabilisation’. And as developing countries were effectively encouraged to decrease investment in the agricultural sector, many donors also stopped funding for the green revolution. The result was a detrimental neglect of agricultural development, and a biased specialisation of the agricultural sector in a few selected export crops.

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The structural adjustment programmes not only encouraged developing countries to eliminate public support to the economy, they also encouraged developing countries to open their markets to trade, effectively exposing infant industries to considerable international competition. Although structural adjustment programmes sought to address and resolve important economic difficulties, the conditionalities attached to the structural adjustment loans were often unhelpful, including the demand that developing countries introduce zero tariffs on food items. Furthermore, while developing countries were encouraged to eliminate all support to the agricultural sector, developed countries have instituted massive support measures for their own agricultural sectors. It has been argued that this unbalanced trade liberalisation in the agricultural market has encouraged food import surges by developing countries, which effectively undermined their agricultural production (e.g. FAO 2003, UNCTAD 2004). Yet it is difficult to determine the exact extent to which the agricultural support measures of developed countries have contributed to the contraction of agricultural production in developing countries. Although the negative effect on agricultural production may not be very significant on average, case study evidence (e.g. FAO 2003, UNCTAD 2004, Herrmann 2007) shows that the effects can be severe in some instances. A further common concern is that the multilateral trading system contributes to unbalanced trade liberalisation in the agricultural sector by encouraging low tariffs on agricultural goods and discouraging support measures for agricultural producers. In many cases however these concerns are not justified, as applied tariff rates on agricultural goods tend to be considerably below bound rates of agricultural goods, and because many support measures for the agricultural sector are indeed classified as permissible support. Table 10.3 shows that in developing countries, bound rates on agricultural goods are 61 per cent on average, whereas applied rates on agricultural goods are 25 per cent, leaving considerable leeway for rate increases. For some developing countries, however, WTO commitments are a real constraint. Côte d’Ivoire, for example, has an average bound rate of 15 per cent which is lower than the developed country average. Furthermore, even countries that have a high binding overhang on average, have products for which the bound rates are in fact very close to the applied rates. As for agricultural support measures, it is necessary to distinguish between the support measures that are classified as trade-distorting and the support measures that are considered permissible. Unlike the former,

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Table 10.3. Agricultural bound and MFN applied tariff rates (simple averages, per cent)

Developed countries Developing countries

Bound (%)

Applied (%)

38 61

34 25

Source: Authors’ calculations, based on UNCTAD TRAINS (Trade Analysis and Information System) and WTO CTS (Consolidated Tariff Schedules) data.

which are classified in the amber and blue box, the latter are classified in the green box. Permissible support measures include, among others, investment in infrastructure, input subsidies for poor farmers, and some direct income support of poor farmers. Thus, as regards agricultural support measures, the binding constraint for most developing countries is not the disciplines imposed by the multilateral trading system but rather a shortage of financial resources. This is particularly true for the LDCs which have the least developed agricultural sector and the greatest need to invest in this sector. While tariffs on agricultural goods have been decreasing since 1995, they are still higher than tariffs on industrial goods. Currently, on average, developed countries continue to have higher agricultural tariffs than developing countries, and they also continue to provide much higher trade-distorting agricultural support than developing countries. Developed countries provide the vast majority of trade-distorting support measures, as classified by the WTO Agreement on Agriculture, but developed countries are gradually reducing this type of support measure. At the same time, it appears that many developing countries are increasing agricultural support measures. Anderson (2009 forthcoming) found that assistance to agriculture – revealed by domestic-to-border price comparisons, adjusted for transport costs and quality differences, among others – is decreasing in high-income countries but increasing in developing countries. While in 1985–1989 developing countries had a negative nominal rate of assistance to agriculture, indicating a tax on agriculture rather than a subsidisation of agriculture, in 2000–2004 they had a positive nominal rate of assistance to agriculture. There are differences, however, between developing countries. African countries, for instance, still have policies in place that tend to discourage rather than encourage agricultural production.

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Directions in ongoing trade negotiations High commodity prices provide both an opportunity and a challenge to efforts to promote the reform of agricultural trade policies. On the one hand, high commodity prices ensure a higher income for agricultural producers and therefore reduce the need for support measures. This situation should facilitate efforts to substantially reduce agricultural support measures. On the other hand, however, high commodity prices reduce the effective protection in agricultural markets and therefore decrease the urgency for reform of agricultural trade policy.3 This, in turn, may slow down reform efforts in agricultural markets. Furthermore, in the current crisis some countries have raised concerns about food security, and are stressing the need for more rather than less agricultural support. Also many net food-importing countries are concerned that a reduction of agricultural support will further increase their food import bill, and subsequently threaten food security. However, despite the importance attached to domestic support and export subsidies, various studies have found that their impact on world prices is relatively small and is less than the impact resulting from tariffs. For example, Peters (2006) has shown that export subsidies, for example, depress world prices only by about 2 per cent for most agricultural commodities. Although differences exist for different commodities, a substantial reduction or elimination of subsidies has in most cases a relatively modest impact on food bills. However, even a small increase in international food prices can have a negative effect on poor people who are heavily dependent on inexpensive food. Whatever the negative effects, they should not abandon the necessary reforms of agricultural trade policies, especially since the provision of agricultural support measures is neither a direct nor an effective instrument to address the possible negative effects. As for those poor net food-importing countries that cannot cope with an increased food import bill, they are best supported through a combination of emergency assistance and development-oriented assistance that strengthens their productive capacities. In short, rather than seeing high commodity prices as an excuse to postpone necessary reforms of agricultural trade policies, they should be seen as an opportunity to encourage the reform of agricultural trade policies. The lack of progress in the Doha Round to date is due to 3

Specific tariffs – tariffs of a specific amount of money that does not vary with the price of the good – are common for many commodities. If the price of the imported commodity increases, the specific tariff decreases in relation.

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unresolved differences between developed countries which provide the most significant agricultural support, and developing countries which seek to develop their agricultural sector. But lack of progress is also due to differences between developing countries that have only weakly developed agricultural sectors, and therefore favour agricultural protection, on the one hand, and developing countries that are competitive agricultural producers, and therefore encourage open agricultural markets, on the other. As the elimination of agricultural support measures is expected to lead to only a small average increase in agricultural prices, a reduction of agricultural support measures would lead to an even smaller increase in agricultural prices. The current negotiations on agricultural trade policies however do not even promise an effective reduction of agricultural support. This is because the negotiations do not focus on the subsidies and tariffs that are actually applied, but rather on the bound levels of subsidies and tariffs, which are typically considerably higher. In the European Union and the United States the proposed cuts for overall trade-distorting support of 80 per cent and 70 per cent, respectively, are ambitious but will not bite into their applied levels of spending. In the case of the United States, however, the newly negotiated product-specific caps will only become binding for a few products, including cotton (Blandford et al. 2008). Furthermore, certain types of support measures would be exempt from commitments even though it has been shown that they are trade-distorting. Direct payments, for example, encourage farmers to stay in business and are thus tradedistorting, even if payments are not linked to their actual production. In short, for the Doha Round to bring about the desired reduction of tradedistorting agricultural support, it would be necessary for negotiations to focus on applied rather than bound levels, and for trade-distorting support to be defined in strict economic rather than political terms. Including tariff reforms does not change this picture. The effects of a successful Doha Round would be minimal. The impact on global production is estimated to be small, about 1 or 2 per cent (Figure 10.4).4 The position of a developing country in the current negotiations on agricultural policies differs considerably depending on whether it is a net importer of agricultural goods or a net exporter. The G-33, which includes 4

The Agricultural Trade Policy Simulation Model (ATPSM) was used for the simulation. The partial equilibrium model was developed by UNCTAD and FAO and is well documented in Peters and Vanzetti (2004). The scenario is a tiered formula for tariff cuts, a reduction of notified amber box support and an elimination of export subsidies as provided for in the draft modalities text (WTO 2008).

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World Developed Developing

Oilseeds, temp. Oilseeds, trop.

Sugar, raw

Maize

Rice

Wheat

Milk, conc.

Poultry

LDC

Bovine meat

5 3 1 –1 –3 –5 –7 –9 –11 –13 –15

Livestock

Change in %

impact on developing countries

Figure 10.4. The impact of trade liberalisation on agricultural production of selected country groups Source: Authors’ calculations, based on ATPSM simulation.

the majority of developing countries, has mostly a defensive interest in the current agricultural trade talks, whereas the G-20 which represents the second largest group of developing countries, assumes an intermediate negotiation position in the agricultural trade talks. On the one hand, it encourages an ambitious reform of agricultural policies in developed countries, while on the other it advocates less ambitious cuts of agricultural tariffs for developing countries. By contrast, most members of the Cairns Group – which represents large exporters of agricultural goods in the multilateral trading system – tend to have an offensive interest in agricultural trade talks. This group includes several economies in Latin America (e.g. Argentina and Chile), as well as economies in Asia (e.g. Thailand and Malaysia) and also one economy in Africa (i.e. South Africa).

Import restrictions on agricultural goods The G-33, which currently represents about 40 developing countries, seek a right to implement special safeguard mechanisms (SSMs), which would enable them to temporarily raise tariffs above bound rates, if affected by a surge of food imports or a sudden drop of food prices, and advocate specific product exemptions (SP), which would allow them not to reduce tariffs on any product that is deemed important for food security. Both measures would enable countries to raise trade barriers above bound tariff rates, and maintain relatively higher trade barriers

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Table 10.4. Impact of agricultural trade liberalisation on producer and consumer surplus of selected country groups (billion US$, current) Doha Round scenario without SP Doha Round scenario with SP Producer surplus (US$ bill.) Developed −54.8 Developing 11.5 LDC 1.0

−55.3 13.7 0.9

Consumer surplus (US$ bill.) Developed 39.0 Developing −12.3 LDC −1.1

39.5 −15.2 −1

Source: Authors’ calculations, based on ATPSM simulation.

compared with the counterfactual, namely full formula cuts as provided by the tiered formula. China and India are among the countries that have strongly defended this position, but the United States has strongly objected to this position, and the inability to find a compromise has so far impeded the conclusion of a new agricultural agreement. Not only developed countries, but also the large agricultural exporters among the developing countries are sceptical about more far-reaching restrictions on agricultural imports and an associated extension of special and differential treatment. Large exporters of agricultural goods among the developing countries fear that import restrictions on agricultural goods imposed by other developing countries will negatively affect the level of their exports and the future expansion of South–South trade. Indeed, a recent study by Stevens, Kennan and Meyn (2007) highlights the possible negative effects of SP exemptions on South–South trade (see Table 10.4). Six out of ten products that are likely to be selected as ‘special products’, and thus excluded from a further reduction of tariffs, account for a large share of the total exports of some developing countries, on the one hand, and are absorbed to a large extent by the markets of other developing countries, on the other. Our simulations with ATPSM, a partial equilibrium model, show that SP exemptions, as discussed in the Doha Round, will stimulate agricultural production in developing countries as a group. The positive effects, however, are small and developing countries that are major

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agricultural exporters would not benefit from such a policy. Consumers are also set to lose from such policies. Using a general equilibrium model, the Global Trade Analysis Project model (GTAP), Polaski (2006) obtained similar results. The policy change would benefit some developing countries in east and south Asia, including Bangladesh and India, but would negatively affect large agricultural exporters in Latin America, including Brazil and Argentina. The simulations, however, are based on static models that do not take due consideration of possible longer term dynamic effects, including employment creation. The utility of the suggested restrictions on agricultural imports is codependent on two other factors: (1) they are negatively correlated with agricultural prices in world markets (if prices are high, the utility of the proposed import restrictions is low); and, (2) they are positively correlated with the level of support provided by advanced countries (if support is high, the utility of the proposed import restrictions is high as well). Considering that agricultural prices are unlikely to stay high forever, and that agricultural support is unlikely to be substantially reduced in the near future, the case for the proposed import restrictions – special safeguard mechanisms and special product exemptions – remains strong. Gayi (2007) argues that as long as developed countries provide large agricultural support measures and distort global agricultural markets, import restriction can be a useful instrument for developing countries to safeguard their agricultural sector and promote food security. The proposed import restrictions, however, are not a panacea. They will not be effective in helping countries to increase their agricultural production if the countries have a weak agricultural potential in the first place. Among the countries that have agricultural potential, the proposed import restrictions on agricultural goods are most useful for those countries that have low bound tariff rates close to applied tariff rates and therefore little leeway to protect their farmers. In short, although import restrictions may in some cases stimulate agricultural production, they are unlikely to effectively address concerns of food security.

Export restrictions on agricultural goods Recent experience has shown that when food prices are high, even large producers of food items may face food insecurity. This normally happens when the local population cannot afford to purchase food at higher prices

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and when the domestic producers therefore export food to foreign markets. To prevent economies which have an abundance of food from slipping into a food crisis, governments may impose restrictions on food exports. This would either depress the domestic price of food items, making it easier for the local population to purchase food, or it would increase public revenues, making it easier for the government to provide special support to lowincome households. Such export restrictions may therefore help to ensure food security in countries that are major food producers. But while a rare and temporary use of export restrictions can be effective in ensuring food security, an excessive and prolonged use of export restrictions can have the opposite effect, as it reduces returns to local farmers and may therefore discourage future investment in the farming sector. Another difficulty associated with the use of export restrictions is that they effectively undermine the very idea of the multilateral trading system. Free trade enables countries to specialise in accordance with comparative advantage, increase imports and exports and ultimately maximise the national wealth. Yet, this system works only if countries can rely on being able to import necessary goods from other countries at all times. Export restrictions undermine this implicit contractual agreement. To ensure the functioning of the multilateral trading system, it is therefore necessary that export restrictions be limited to very exceptional circumstances. Among the major cereal producers, Argentina, China, India, Indonesia, Kazakhstan, Russia and Vietnam imposed export restrictions. While this is understandable from the perspective of a food-exporting country that seeks to ensure food security, it is detrimental from the perspective of a food-importing country that relies on sufficient food imports. The negative impact is particularly large for low-income countries that cannot afford to purchase food at premium prices on the world markets. Many developing countries, however, seem unwilling to effectively constrain export restrictions. They either reject more stringent rules on export restrictions or they themselves seek exemptions from corresponding commitments. Even if they are not currently using export restrictions, they are reluctant to forego this opportunity. Consequently, the latest draft modalities text (WTO 2008) proposes only weak additional rules on export restrictions.

Conclusions While commodity prices started to fall after the recent peak, prices are likely to remain at a higher level, compared with the long-term trend and

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especially bust phases. Commodity exporters benefit from higher prices, but due to a low potential for a supply response, the benefits in most developing countries are below potential. Furthermore, higher prices of food threaten food security in many poor countries. In contrast to import restrictions, which may help food-importing countries to increase food output and address the challenge of food insecurity in the medium term, export restrictions may help foodexporting countries to decrease domestic food prices and address the challenge of food security in the short term. However, it must be acknowledged that import restrictions alone are unlikely to bring about a very large increase of food production, and that export restrictions are only a short-term and partial solution to food insecurity, which can temporarily help countries that are net food exporters, but will inevitably hurt countries that are net food importers. Hence, neither import nor export restrictions are comprehensive solutions to the challenge of food insecurity and food crisis. In order to develop appropriate approaches to address the challenge of food insecurity it appears necessary to recognise that the dependence on food imports does not necessarily imply a higher risk of food crisis, and inversely that a higher rate of food self-sufficiency is not always a viable solution to food insecurity. Although a higher rate of food self-sufficiency can help to increase a country’s food security, efforts to promote food selfsufficiency have a high opportunity cost in countries that have neither a current nor a potential comparative advantage in food production. Therefore, the popular notion that the best way to decrease exposure to food insecurity is to decrease dependence on food imports also challenges the free trade principles. Furthermore, evidence shows that the majority of countries that depend on food imports are not affected by food insecurity, whereas a large number of countries that have a relatively large agricultural sector tend to be affected by food crises (Herrmann 2007). At the country level, food security does not depend on whether countries are able to produce sufficient food at home, but whether they are able to import necessary food. Similarly, at the level of households, food security does not depend on whether households are able to produce sufficient food for their own consumption, but whether they are able to purchase necessary food. The current crisis shows that food crises happen in both low-income countries that are net importers and low-income countries that are net exporters of food, as the poor are unable to pay more for food. Hence, rather than focus per se on net food-importing countries, the WTO

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provisions on food security should focus primarily on low-income countries. To more clearly and narrowly identify the countries to be targeted by these provisions will also help to give more bite to the provisions. In particular, it is desirable that the provisions on food security clearly identify the types and terms of the emergency assistance required to help countries cope with acute food crisis, as well as the types and terms of development-oriented assistance required to help countries develop their productive capacities. Emergency support to food insecure countries may include food aid and balance of payments support. But to ensure that food aid does not significantly distort markets, it is desirable that such aid be provided in the form of cash rather than in kind, and that it does not allow for the disposal of surplus food production; in order to ensure that balance of payments support actually aids the countries concerned, it is necessary that this support be provided in the form of grants rather than loans and that conditionalities are not attached. To limit the negative side-effects of food aid, WTO Members are discussing conditions that would be part of a new agreement on agriculture (for more details, see Chapters 11 and 12 of this volume). In addition to such emergency measures which help countries to address the acute challenge of a food crisis, it is necessary to support them to decrease their vulnerability to food insecurity. To this end, developing countries may consider temporary subsidies to encourage an increase in future agricultural output. Developing countries should not make the same mistakes as developed countries did in distorting their markets, but support measures can be useful in extreme circumstances such as the current crisis, to improve productivity in developing countries, to allow them to utilise their potential, and to kick-start increased production. Although many types of subsidies are not permissible, the Agreement on Agriculture provides sufficient leeway for such support measures. Countries may, for instance, subsidise essential inputs, such as fertilisers, or may even provide direct support to small-scale farmers. It has been reported that even least-developed countries, such as Mali, have successfully used such support measures (Dugger 2007). However, such support faces clear limits in poor countries, which lack the financial resources to finance such support measures. On the one hand, these countries have a relatively large number of poor households and farmers; on the other, they have a relatively low level of aggregate income. Where low-income countries are concerned, it is therefore important that development of the agricultural sector, as well as the development of

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non-agricultural sectors, be more effectively promoted through development assistance. Development assistance should focus on strengthening productive capacities. The development of productive capacities is necessary for higher and more sustained rates of economic growth, the creation of more and more productive employment opportunities, and ultimately food security. Promoting the development of productive capacities is therefore the most promising strategy in the fight against food insecurity. This strategy however requires a major rebalancing of aid provided to the LDCs in particular. In recent years, an increasing share of aid has been dedicated to coping with emergencies rather than to promoting development, and an increasing share of development-oriented aid is dedicated to governance and the social sector, neglecting production and economic infrastructure (UNCTAD 2006, 2008a). The rebalancing of aid requires renewed investment in agricultural development (UNCTAD 2007, 2008b, Oxfam 2008, South Centre 2008), but at the same time, it calls for an increase of aid to non-agricultural sectors, especially in countries with weak agricultural potential. Aid for trade is important in this context, but it will need to be complemented by aid for productive capacity development more broadly. This is because poor countries require not only assistance with respect to storage transport, product standards, customs procedures and trade rules; more fundamentally, they require aid for the development of vital physical infrastructure, banking systems, business support institutions, technologies, skills and knowledge-systems (Gore and Herrmann 2008a, 2008b). For enterprises to increase international trade and integrate themselves better into international value chains, they must increase the international competitiveness of their products, in particular by improving productivity and product quality. In conclusion, the current trade negotiations on agriculture could make more progress on agricultural policy reform to obtain a development-friendly outcome. However, despite many likely shortcomings, a new agreement on agriculture could still have long-term benefits, as it would lock in many unilateral efforts to liberalise agricultural markets, while giving flexibilities to developing countries, especially the LDCs and other small and vulnerable economies. It is proposed that LDCs would not have to make new commitments in agriculture and small and vulnerable economies would have significantly lower reduction commitments combined with a high degree of flexibility. Furthermore, a new concept of trade-distorting support, which includes

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a wider range of trade-distorting measures, and also fixes upper limits for such measures, can be an important step in the right direction. Finally, the introduction of product-specific limits reduces flexibility and thus potential trade distortions.

References Anderson, K. (ed.) 2009 forthcoming. Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007. London: Palgrave Macmillan and Washington, DC: World Bank. Aksoy, M. A. and Izik-Dikmelik, A. 2007. Are Low Food Prices Pro-poor? Net Food Buyers and Sellers in Low Income Countries. Washington, DC: World Bank, mimeo. Blandford, D., Laborde, D. and Martin, W. 2008. ‘Implications of the February 2008 WTO Draft Agricultural Modalities for the United States’, Paper presented at ICTSD, IPC and IFPRI Seminar, Draft Agriculture Modalities for the Doha Round: Taking Stock of the Trade and Development Implications, Geneva, 12.03.2008. Cerra, V. and Saxena, S. C. 2005. ‘Growth Dynamics: The Myth of Economic Recovery’, IMF Working Paper 05/147, Washington, DC. Cline, W. 2004. Trade Policy and Global Poverty. Washington, DC: Center for Global Development and the Institute for International Economics. David, M. and Herrmann, M. 2002. ‘Recent Price Changes in Primary Commodities, 1998–2000: Implications for Least Developed Countries’, Background Report to the Least Developed Countries Report 2002, Geneva: United Nations Conference on Trade and Development (UNCTAD). Deaton, A. and Miller, R. 1996. ‘International Commodity Prices, Macroeconomic Performance and Politics in sub-Saharan Africa’, Journal of African Economies 5: 99–191. Dugger, C. W. 2007. ‘Ending Famine, Simply by Ignoring the Experts’, Herald Tribune, 1 December 2007. FAO 2003. ‘Some Trade Policy Issues Relating to Trends in Agricultural Imports in the Context of Food Security’, Report of the 64th Session of the Committee on Commodity Problems, 18–21 March, Rome: Food and Agriculture Organization of the United Nations (FAO). Fei, J. and Ranis, G. 1964. Development of the Labor Surplus Economy. Homewood, IL: Irwin. Gayi, S. 2007. ‘Does the WTO Agreement on Agriculture Endanger Food Security in sub-Saharan Africa?’ in Guha-Khasnobis, B., Acharya, S. S. and Davis, B. (eds.), Food Security: Indicators, Measurement, and the Impact of Trade Openness. Oxford University Press.

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Gore, C. G. and Herrmann, M. 2008a. ‘Trade and Investment in LDCs’, in UNDP (ed.), Making Globalization Work for Least Developed Countries. New York: United Nations Development Programme. Gore, C. G. and Herrmann, M. 2008b. ‘Technology and Innovation in LDCs’, in UNDP (ed.), Making Globalization Work for Least Developed Countries. New York: United Nations Development Programme. Herrmann, M. 2007. ‘Agricultural Support Measures of Advanced Countries and Food Insecurity in Developed Countries: Economic Linkages and Policy Responses’, in Guha-Khasnobis, B., Acharya, S. S. and Davis, B. (eds.), Food Security: Indicators, Measurement, and the Impact of Trade Openness. Oxford University Press. Herrmann, M. and Khan, H. A. 2008. ‘Rapid Urbanization, Employment Crisis and Poverty in African LDCs: A New Development Strategy and Aid Policy’, mimeo, available at http://mpra.ub.uni-muenchen.de/9499/1/MPRA_paper_9499.pdf Hertel, T., Ivanic, M., Preckel, P. and Cranfield, J. 2004. ‘The Earnings Effects of Multilateral Trade Liberalization: Implications for Poverty.’ World Bank Economic Review 18: 205–36. Khan, H. A. and Thorbecke, E. 1988. Macroeconomic Effects and Diffusion of Alternative Technologies within a Social Accounting Matrix Framework: The Case of Indonesia. Aldershot: Gower. Lewis, W. A. 1954. ‘Economic Development with Unlimited Supplies of Labor’, The Manchester School 22: 139–91. Oxfam 2008. Double-edged prices. ‘Lessons from the Food Price Crisis: 10 Actions Developing Countries Should Take’, Oxfam Briefing Paper, 16 October 2008. Peters, R. 2006. Roadblock to Reform: The Persistence of Agricultural Export Subsidies. Geneva: UNCTAD. Peters, R. and Vanzetti, D. 2004. User Manual and Handbook on Agricultural Trade Policy Simulation Model. Geneva: UNCTAD. Polaski, S. 2006. Winners and Losers: Impact of the Doha Development Round on Developing Countries. Washington, DC: Carnegie Endowment for International Peace. South Centre. 2008. Food and Energy Crisis: Time to Rethink Development Policy. Reflections from the High-Level North-South Dialogue on Food and Energy Security. Geneva. Stevens, C., Kennan, J. and Meyn, M. 2007. South–South Trade in Special Products, Revised Report. London: Overseas Development Institute (ODI). Stifel, D. and Thorbecke, E. 2003. ‘A Dual-Dual CGE Model for a Stylized Archetype African Economy’, Journal of Policy Modelling 25: 207–35. UNCTAD 2004. The Least Developed Countries Report, 2004: Linking International Trade with Poverty Reduction. New York and Geneva: United Nations.

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UNCTAD 2005a. Economic Development in Africa: Rethinking the Role of Foreign Direct Investment. New York and Geneva: United Nations. –––The Trade and Development Report 2005: New Features of Global Interdependence. New York and Geneva: United Nations. –––The Least Developed Countries Report 2006: Developing Productive Capacities. New York and Geneva: United Nations. –––The Least Developed Countries Reports 2007: Knowledge, Technological Learning and Innovation for Development. New York and Geneva: United Nations. –––The Trade and Development Reports 2008: Commodity Prices, Capital Flows and the Financing of Investment. New York and Geneva: United Nations. –––‘Addressing the Global Food Crisis: Key Trade, Investment and Commodity Policies in Ensuring Sustainable Food Security and Alleviating Poverty’, UNCTAD Report prepared for the High-Level Conference on World Food Security: The Challenge of Climate Change and Bioenergy, Geneva: United Nations Conference on Trade and Development. –––The Least Developed Countries Report 2008: Growth, Poverty and the Terms of Development Partnership. New York and Geneva: United Nations. WTO 2008. ‘Revised Draft Modalities for Agriculture’, 10 July (TN/AG/W/4/ Rev.3), Geneva: World Trade Organization.

11 Responses by the international trade and aid community to food security susan prowse* Introduction This chapter assesses the origins of the food price rises in the context of the international trade-distorting policies (including through food aid), global food markets and food price developments and trends. Recognising that the policy response to higher food prices requires both a short and longer term perspective, this chapter looks at both the efficacy of immediate mechanisms (notably food aid both in kind and in cash, including the impact on domestic production incentives) and at medium to longer term support of agricultural development and trade. The short-term policy dimension needs to be set in the context of the ‘right to food for the truly needy’.1 Although the issue of food security arguably lies outside the remit of the WTO and the scope of regional trade arrangements, it is unsurprising that, without reliable and effective support mechanisms, countries will look to trade policy instruments to address food and livelihood concerns. This chapter reviews the adequacy *

1

Senior Economic Advisor, Department for International Development, UK. The views expressed are entirely personal and should not be associated with any affiliated agency/ government. The right to food is a human right and is a binding obligation well established under international law, recognised in the Universal Declaration on Human Rights and the International Covenant on Economic, Social and Cultural Rights, as well as a plethora of other instruments. The right to food is defined as ‘the right of every man, woman and child alone and in community with others to have physical and economic access at all times to adequate food or means for its procurement in ways consistent with human dignity’. According to the right to adequate food (Art. 11) United Nations Economic and Social Council (UNESC) E/C.12/1999/5, the right to food implies three types of obligations: the obligations to respect (existing access to adequate food), protect (access to and utilisation of resources and means to food security) and to fulfil (facilitate) in activities intended to strengthen people’s food security. Finally, ‘whenever an individual or group is unable to enjoy the right to adequate food by the means at their disposal, States have the obligation to fulfil (provide) that right directly’ (i.e. to ensure ‘the right to food of the truly needy’).

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of existing food aid instruments and trade policy rules and measures. It recognises that support to a global system, which progressively seeks to liberalise trade in agriculture, is severely compromised by the lack of a credible and predictable system of support. The author proposes and recommends a serious reflection on and assessment of the need for a stand-alone emergency mechanism that is cash based and determined ex ante by criteria reflective of global prices of staple foods and malnutrition and famine indicators and therefore not linked to (i.e. decoupled from) trade liberalisation in agriculture (unlike the ‘Marrakesh Decision’). In terms of medium-term support and policy advice, the chapter draws on the work and rationale that gave rise to the concepts associated with the ‘Aid for Trade’ initiative (Prowse 2006, Hoekman and Prowse 2009). There were two very distinct purposes to proposing the increased allocation of resources to ‘Aid for Trade’. Firstly, it was recognised that in terms of overall development assistance, there had been a significant underinvestment by donors (both bilateral and multilateral), in trade, growth and the productive sectors of the economy, including agriculture. But the second purpose was that of political economy. It was specifically recognised that if international structures are to provide considerable aggregate welfare gains representing strong global public goods in themselves, they will need additional support and revitalisation (i.e. as the cost of potential yet substantial global benefits). In the context of agriculture, countries (and notably the poorest) need support and confidence in the international systems to overcome fears related to food security, to meet the need for adjustment and social protection, and to take full advantage of the opportunities that effective international systems would offer. The chapter provides a background to the rationale for ‘Aid for Trade’ and its evolution in the international trade architecture. It looks at addressing preference distortions through increased Aid for Trade. Adjustment to higher food prices may well imply a policy prescription of trade reform and facilitating agricultural trade in developing countries. In turn, however, this requires an assessment of the fiscal and macroeconomic implications and appropriate support responses (including safety nets). To a large extent, the increase in food prices provides an opportunity for the global community (donors both traditional and non-traditional) to refocus on investment in agriculture and social protection where there has been a long-term problem of underinvestment in agriculture. Finally, the chapter also reflects on whether, in light of the prolonged failure to achieve an agreement through the Doha Trade Round, now

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may well be the time to consider how appropriate the present agenda is to the current and future trends in the agricultural sector.

Factors behind the recent food price rise Domestic policy responses and international efforts to address recent turbulence created by the rise in food prices are determined by the complexity and juxtaposition of a host of factors that underlie the recent upward trend and spike in prices. As discussed in detail by Jones and Elasri (Chapter 5), these factors can be clustered around three categories: (1) seasonal and cyclical factors: drought, flooding, pests and disease in key grain regions, the declining dollar and low stocks; (2) speculative factors: excessive pricing bubbles, significantly above prices justified by fundamentals, contributing to price volatility, through raised expectations, speculation and hoarding (including through export bans); and (3) structural factors: energy policy and pricing, climate change, increased demand associated with increased income of emerging countries and dietary changes. Consequently, single-instrument solutions and policy prescriptions to curb the upward trend and volatility in food prices are inappropriate. Arguably the first two categories are predominantly responsible for the volatility and price spikes, while the third is likely to result in a more permanent upward shift in prices. The rising trend in food prices is not observed to be a temporary phenomenon, but is expected to persist in the medium term. The World Bank, Food and Agriculture Organization of the United Nations (FAO), Organisation for Economic Co-operation and Development (OECD), and United States Department of Agriculture (USDA) are continuing to predict commodity prices that will remain above the 2004 levels for most food crops until 2015. According to the World Bank, before the rise in food prices, 850 million people already had too little food to eat. The Bank suggests that higher prices have the potential to push a further 100 million people into hunger, while rising food prices also undermine recent gains in reducing malnutrition: malnutrition is a contributing factor in more than half of deaths in children under the age of five years in developing countries. Just as importantly, however, in terms of policy response, price volatility is likely to continue to be a factor, given climatic changes.

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To a large extent, current global food production and trading systems can provide a sufficient surplus of staple food to meet demand reasonably reliably (albeit not in the most efficient manner, for example, because of environmental degradation, and at global prices that are likely to be higher than previous trends). Currently the world is producing more than 340 kg per head of grain per year, more than sufficient to feed the global population (Wiggins 2008). Hunger and malnutrition are far less a problem of global supply than one of income, food distribution and local market distortions. The issue therefore becomes one of how to ensure effective food distribution both in the short and longer terms, and how to raise income and minimise local market distortions in the medium to longer term. In the medium to longer term, this will require a more open trading system (notably regionally) and it will need to be complemented by in-country support for agriculture (aid for agricultural production and trade). In the immediate to short term however, the issue remains one of distribution. It is also one of how to provide an effective, reasonably immediate and predictable response to external shocks, which does not distort local markets and will not incline countries to implement mitigating trade policies that are destabilising to food production and trade globally, and counterproductive to medium-term policy responses to food security.

Immediate policy response mechanisms The efficacy of food aid Over the years, the domestic and export subsidies provided by a number of OECD countries, notably the United States, the European Union, Switzerland, Japan and Norway, have greatly increased supply above that which market prices would have warranted. This has allowed excess production to be sold on world markets at prices well below production costs. In turn this has reduced global food prices over recent decades. It has inevitably hurt farmers in developing countries who have found it difficult to compete with subsidised exports. The Doha Trade Round has concentrated on reducing these traditional forms of agricultural protection, particularly export subsidies and domestic support. The major beneficiaries will be larger emerging economies and larger farms. However, in terms of poverty reduction and food security, of particular concern to low-income subsistence and small-scale farmers, has been the highly distortionary impact on production resulting from the provision of

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food in kind (food aid). While food aid can be indispensable in cases of disasters when normal supply channels are completely disrupted, it has in many instances had undesirable and unintended consequences. Food aid in kind delivered in significant quantities has a potentially very large impact on local market prices. The distortion is often magnified because distribution is free and therefore even if the food is sold at ‘market price’ actual sales prices are frequently far below local prices. This tends to depress prices for local producers, lowering their incomes and reducing incentives for production and thereby increasing the country’s future dependence on food imports. Furthermore, the reduction in prices created by food aid, distorts seasonal (inter-harvest) price movements and discourages the development of private storage facilities. Additionally, food aid is often distributed through governmental channels and can significantly undermine private sector development of marketing infrastructures. This is one of the principle forms of food assistance provided by a few donors, notably the United States, Canada, and Germany. While many donor countries have shifted emergency food aid to a cash-based system, which entails purchasing from farmers in-country or in neighbouring countries, food aid in kind still makes a significant contribution to overall emergency assistance (Polaski 2008). The same shortcomings apply to tying assistance by subsidised credit for food imports (including export credit from the exporting countries). Subsidising imports depresses farmers’ prices and discourages production. Subsidies can distort seasonal price movements and are often channelled through government agents, undermining private sector market development (Ingco et al. 2004). Untying of food aid would imply a significant increase in assistance for any given amount of financial resources (Subramanian 2008). If the tying requirements were eliminated, just the savings from not having to pay the increased shipping and distribution costs would allow every dollar of food aid to go much further (Elliot 2006).

The ‘Marrakesh Decision’ Negotiators recognised that reforms that were part of the Agreement on Agriculture negotiated during the Uruguay Round, may adversely affect least-developed countries (LDCs) and net food-importing developing countries (NFIDC).2 This was due to possible increases in world food prices 2

The least-developed countries (LDCs) are defined as those recognised by the Economic and Social Council of the United Nations. The net food-importing developing countries

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resulting from agricultural reform. To address the concerns of LDCs and NFIDCs, the Marrakesh Ministerial Conference of 1994 approved a decision on the possible negative effects of the reform programme (the ‘Marrakesh Decision’). It recognised that the ability of LDCs and NFIDCs to finance adequate levels of commercial imports of basic foodstuffs may be compromised and consequently appropriate compensation measures are needed. The ‘Marrakesh Decision’ provided for the following: *

*

*

a review of the level of food aid and negotiations on food aid commitments sufficient to meet the needs of developing countries; adoption of guidelines to ensure that food aid is given in grant form and/or on concessional terms in line with Article IV of the Food Aid Convention of 1986 to include support by the international financial institutions (IFIs) (International Monetary Fund (IMF) and World Bank); and technical assistance by Members, in the context of their aid programmes, to LDCs and NFIDCs for improving agricultural productivity and infrastructure, again largely under provision from the IFIs as well as bilateral donors.

No concrete measures were subsequently decided and the policy instruments suggested inevitably represented best endeavour promises, being totally outside the remit and competence of the WTO (discussed in detail by Häberli, Chapter 12). To a large extent the problem with effectively engaging the IFIs was the inability to establish causality between trade reform undertaken in the context of the Agreement on Agriculture and changes in global food prices and food security. Under the draft modalities for the Doha Trade Round, somewhat predictably, food aid and security (both in terms of amounts and type) continue to be dealt with on a best endeavour basis. For example, the draft modalities call for ‘commitment to maintain an adequate level of international food aid’ and for members to ‘commit to making their best efforts to move increasingly towards more untied cash-based food aid’.3 This position is hardly credible as an assurance to low-income countries and net food-importing countries, in particular, that their food needs will be met in the event of external shocks. Although the issue of food security

3

(NFIDCs) are Barbados, Botswana, Côte d’Ivoire, Cuba, Dominica, Dominican Republic, Egypt, Honduras, Jamaica, Jordan, Kenya, Mauritius, Morocco, Namibia, Pakistan, Peru, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Senegal, Sri Lanka, Trinidad and Tobago, Tunisia and Venezuela. Revised Draft Modalities for Agriculture, TN/AG/W/4/Rev.2, 2008, Annex L, paras. 1–3.

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arguably lies outside the remit of the WTO, without an effective instrument it is unsurprising that countries will look to trade policy instruments to address their concerns.

Trade policy measures to ameliorate short-term threats to food security The rise in prices of major food commodities over the past couple of years has been exacerbated by two types of trade policy intervention: export restrictions on foodstuffs, and trade-related biofuels policies in the industrialised countries (covered in detail by Schmidhuber and Matuschke, Chapter 6). At the peak of the food price hike in 2008, 18 developing countries imposed some form of export restrictions. On justifiable grounds of domestic political economy, each country was trying to maintain adequate domestic supplies. But predictably, as more countries implemented export bans, global supply contracted, pushing prices up further and aggravating global food insecurity. This has inevitably encouraged importing countries towards a programme of self-sufficiency given the unreliability of global food trade and as an insurance in difficult times. Two mutually supportive policy instruments are required to ally the concerns of low-income countries, notably those that are net importers of food and provide for a more open trading system in agriculture. Lowincome countries need to be assured (and net food-importing countries in particular) that fears over food security will not be exacerbated by trade policy and that support and assistance mechanisms are predictable and adequate in the event of global price shocks, whatever the underlying cause. At present, export bans are not disciplined under the WTO (neither are they a part of the current Doha Development Agenda (DDA) negotiations), although the need to restrict export bans is crucial given that countries confronted with them (notably net food importers) need to be able to support their farmers through restrictive trade policies. Justifiably, in the absence of reliable world markets for food, countries cannot help but look towards self-insurance and support of their own farmers. Therefore the global trading system needs to provide credible assurance that both imports and exports for food remain open in good times and bad (Mattoo and Subramanian 2009). However, this needs to be complemented by a predictable system of assistance for those in need in the event that prices for food increase significantly (i.e. to achieve a serious instrument that ensures the right to adequate food). To be credible the system should be a stand-alone instrument

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and be determined on the basis of trends in global food prices and according to need. To be effective it should not be linked to (i.e. decoupled from) trade liberalisation in agriculture (unlike the ‘Marrakesh Decision’).

Existing mechanisms – IMF, World Bank and UN support The IMF provides short-term finance for countries in need. In response to external food price rises the Fund can provide assistance through its Exogenous Shock Facility (ESF) for low-income countries and the Compensatory Financing Facility (CFF). These are the only international mechanisms that are specifically linked and can be triggered following exogenous shocks and adverse movements of certain commodity prices. The external shock and/or commodity price change is assessed on the basis of balance-of-payments need. A number of developing countries view the ESF and CFF as having a number of shortcomings, including limited commodity coverage, and that the usual IMF terms on the facility and policy conditions can apply. The ESF is aimed, however, to meet the needs of low-income countries for rapid and adequate shock assistance with streamlined conditionality requirements. For the CFF the terms are usually better than commercial ones; they are not provided on a concessional basis, although surcharges do not apply. The value of the support largely has to be determined by the country’s capacity to repay including current debt service obligations. Importantly, in the context of food security, the loan is provided through general budget support and therefore the benefits may not be shared with the people within the country whose food security is at risk due to higher food prices. The assessment of need is in most if not all cases ex post. At present the World Bank has no facility that is specifically designed to help countries manage price shocks, as is the case with ESF or CFF, but it does have a number of instruments to provide emergency assistance when a country is hard hit by an exogenous shock that dislocates its economy and requires a quick response. This assistance again is generally provided through budget support, thereby making foreign exchange available for additional food imports and in-country social protection programmes. The bulk of the response tends to be through traditional lending and non-lending support by the Bank for dealing with medium to longer-term structural impediments, and consequently takes time to make a significant impact. Help is provided to stimulate food grain supply over the medium term, including strengthening basic infrastructure by investment in agricultural technology. Some investment projects are also

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aimed at improving trade and distribution facilities and countries’ trade facilitation infrastructure (World Bank 2008a). The UN system and regional development banks also have a range of facilities and support instruments, both for short-term help to meet immediate concerns and for longer term support initiatives to increase local production and trade. The World Food Programme working alongside other partners is largely responsible for immediate assistance. However as is the case with other sectors, assistance is frequently provided in a rather fragmented and ad hoc manner without due consideration to the country’s national plans, and hence the continuous calls for harmonised processes. Moreover all assistance is based on an ex post assessment. Immediacy in delivery is critical in this sector, however, to prevent escalation of the problems associated with hunger and malnutrition. Just as critical is the fact that food aid declines at the moment when it is most needed. As food aid is programmed by budget, not volume, rising prices reduce supply and therefore food availability falls just when it is needed the most, requiring a call to donors and additional time lost before providing a response. Throughout 2008, the World Food Programme urged donors to increase assistance to help meet the higher costs of food aid (identifying a funding gap of US$ 750 million to meet the higher costs of food for emergency use) and suggested that all parties should work towards a comprehensive and coordinated approach and greater alignment with national efforts and priorities (Levy and Wiggins 2008).

Time for an ex ante mechanism to respond to short-term threats of food security? The structural shifts that contributed to the food price spike of 2008 suggest that prices, while tending to decrease from these peaks, will remain above the levels seen earlier this decade. Moreover food price volatility is likely to become more frequent, brought about by uncertainties associated with the international financial banking crisis and variable climate. Therefore, irrespective of medium-term policy shifts towards agricultural investment, including in infrastructure, policy responses will continue to need a short-term dimension that will provide the poor with a buffer against food insecurity.

Food stocks Food stocks, built up in the decade following the food price peak of the early 1970s, have been run down, falling from around one-third of

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annual use to less than one-fifth. This decline to levels that represented operating stocks at ‘just-in-time’ inventories (i.e. day-to-day transactions), provided little or no buffer for alleviating price pressures. In the 1970s and 1980s many developing countries implemented a grain buffer stock system to physically provide grain surpluses from low price years during high price years. In practice, this policy tended to entail high fiscal costs and difficult management and governance issues, while its benefits for household food security were not clear (World Bank 2008b). For the future it may well be beneficial to raise stocks from the current exceptionally low levels. However, in terms of operating costs, distributional issues and impact on local producers, increasing stocks is only a very partial solution to the problem of providing an effective short-term policy response for the poor.

Cash support Interestingly, the approaches taken towards meeting the food needs of the domestic poor in several donor countries differ markedly from those taken towards international food aid. In the United States, for example, domestic assistance is provided through a mandatory programme with trigger criteria determined by overall economic activity, and/or poverty increases for other reasons (including food prices). In addition, the assistance is provided largely by an electronic debit card, which can be used to purchase a very broad range of food items without regard to whether they are domestically produced or imported (see Chapter 9). A possible way of providing a rapid response to help the poorest following a sudden spike in international food prices would be to establish an ex ante facility, available for eligible LDCs and low-income net food importers. The availability of resources would be determined by objective criteria, agreed in advance, such as by global food prices, country per capita income and other factors related to warning indicators of malnutrition and famine. This would allow countries to import (or domestically procure) basic food staples up to an agreed limit. The criteria and trigger for this mechanism would be determined in advance. Support would be for basic food staples and not for general budget support. It would have the advantage of being immediate, and cash-based, providing a ‘right to food for the truly needy’. Moreover, the triggers would be based on price spikes in global food prices whatever the causes (including, although unlikely, significant price rises as a result of agricultural trade liberalisation). In other words, this instrument, unlike the ‘Marrakesh Decision’, would be decoupled from new trade disciplines.

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Medium- to long-term response mechanisms Background and rationale for Aid for Trade The rise in food prices over the last couple of years does reflect a number of long-term structural factors which, in terms of longer term food security, need to be addressed. In terms of trade policy as discussed by Martin and Ivanic (Chapter 2), taking appropriate action towards an open trade regime is supportive for promoting development, providing incentives to increase production and technology transfer, and reducing the cost of food to consumers and particularly to the poorest consumers. However, the benefits of trade reform for growth and alleviation of poverty, and notably in agriculture, are dependent on at least two conditions being met: (1) Market access regimes need to be favourable to the products of importance to low-income developing countries. (2) These countries require support to meet the opportunities that market access improvements offer in terms of human, institutional and production capacity, as well as support to adjust to trade reform and to facilitate behind-the-border domestic policy reform (Njinkeu and Cameron 2007). Prior to the recent initiative on Aid for Trade, donors had provided assistance to developing countries for many years including, in principle, support to countries to increase trade and support growth. What has set the recent push on Aid for Trade apart from previous efforts is largely derived through (i) experience of past aid practices and (ii) theoretical underpinnings. These show that if one is to take international trade theory seriously, one should factor into negotiations the recognition that trade agreements (multilateral and regional) may imply strong aggregate gains but will simultaneously involve redistributive impacts and costs. For some countries, a domestic response to the reform is too costly both in terms of resources and for political economy reasons. The Aid for Trade initiative that emerged in 2005 had two very distinct purposes: to address existing aid practices and to take international trade theory seriously.

Evidence of aid practices A comparative analysis of growth in a number of countries (Spence 2008 among others) clearly demonstrates that no country has developed

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successfully by turning its back on international trade and long-term capital flows. However, the evidence does suggest a need to place trade reform in the broader context of a development strategy that will allow a gradual opening to imports and foreign investment as the complementary behind-the-border institutional and social structures are put in place. Seen in this context, it makes sense to support trade and growth priority areas as defined in national development plans and strategies, and clear accountability on the delivery of assistance. However, empirical assessment of aid delivery during the early part of this decade shows little support for the productive side of the economy. Promotion of trade and investment within a country’s national development strategy has been weak. Reviews of Poverty Reduction Strategy Papers (PRSPs) indicate that the productive sectors and the growth agenda receive limited attention. Trade concerns, when they were expressed in PRSPs, did not necessarily result in trade-related investment (Capra International 2003, Hewitt and Gillson 2003, World Bank 2004). In part this is because investments needed for trade compete with other much-needed country-level investments in such areas as health and education, which donors have been actively pressing developing countries to make. A significant factor behind the present difference between supply and demand for food can be explained by the ‘decades-long underinvestment in agriculture’ in many developing countries (Polaski 2008). Some countries that were previously self-sufficient in food have become net importers. The World Bank identifies five factors responsible for this change, most of which are related in part to the modus operandi of donors (both bilateral and multilateral) and/or agricultural support policies in donor countries. These factors are: *

*

* *

*

declining international commodity prices that have made agricultural investment less profitable; competing demands for development assistance from social sectors such as health and education; emergency responses to food crises in the form of food aid in kind; opposition from farmers in some donor countries to support for agriculture in competing export markets of recipient countries; and opposition from environmental groups (World Bank 2008c).

The World Bank’s support for agriculture declined even more than that of bilateral donors, from 33 per cent of its development aid in 1981 to just 8 per cent in 2001 (World Bank 2007).

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Taking international trade theory seriously However, even accepting that trade is likely to generate aggregate gains, the distributive and redistributive dimensions of trade integration need to be taken into account if the political viability of the process is to be ensured (Verdier, 2005). That is, policy needs to take international trade theory seriously. Domestic adjustment and reform may be too costly in terms of resources and implied political response for some developing countries. Historically it is worth noting that providing significant assistance has been instrumental in persuading countries to adopt more democratic, open, market-oriented systems. The European Union provides a system of ‘jurisdictional convergence’ where Member States are obliged to accept freedom to trade and migrate, and movement in capital. In exchange the European Union has provided a process for relatively successfully integrating the poorer Member States and helping them converge with the richer ones. The post-war Marshall Plan was instigated in large measure to neutralise the forces moving Western Europe away from multilateral trade (Foreman-Peck 1983) and thereby facilitate global economic recovery. About US$ 13 billion, representing several percentage points of US gross domestic product, was provided between 1948 and 1952 (Price 1955). In the Doha Declaration of 2001 there was no mention of Aid for Trade. It did mention the need for technical assistance for countries to comply with new rules and obligations, stating that ‘technical cooperation and capacity building are core elements of the development dimension of the multilateral trading system’ (WTO 2001), but there was no statement that this should be a negotiated part of the Round. It did not envisage any possibility of losses from trade liberalisation. The concept of a ‘development round’ was based on the understanding that broad-based improvements in market access would provide significant benefits for all developing countries and an assumption that it could not be harmful. Responding to the repeated expressions of concern by developing countries, significant research was undertaken leading to the policy conclusions and issues relating to Aid for Trade. In particular, it covered the importance of complementary support for trade-related supply capacity needs, adjustment issues notably related to preference erosion, and fiscal costs as well as concerns expressed by net food importers. From 2004 to the first half of 2005, a group of aid officials and experts chaired by Ernesto Zedillo examined what developing countries could gain from

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the Round and concluded that Aid for Trade was an essential part of a package to rescue the Round and ensure that developing countries gained (Zedillo 2005).4 Others followed (including the Commission for Africa, later in 2005,5 the World Bank/IMF (2005), reiterating the importance of Aid for Trade to help developing countries benefit from the opportunities offered by a trade round. With increased recognition that a successful liberalising trade round would for some bring adjustment costs and a need for capacity building in productive areas, if they were to benefit from the round, Aid for Trade was added to the Doha Negotiating Round in December 2005, four years after the agenda had been agreed, and after all countries had set their negotiating mandates.6 This situation was exceptional as there was no other precedent to an expansion of the mandate midway through negotiations. Getting Aid for Trade added to the WTO’s mandate was intended to protect the weakest members and those with least stake in the liberalising function of the WTO, and notably for LDCs and others depending on preferential rather than MFN access to developed countries, a challenge to normal analyses of power within the WTO. It committed the WTO to having a monitoring role in aid. 4

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The Global Trade and Financial Architecture Programme comprised a steering committee chaired by Ernesto Zedillo, Director of the Yale Center for the Study of Globalization (former President of Mexico). The work was designed to build on the findings of the UN Millennium Project Task Force on Trade. For further details, see http:///www.ycsg.yale. edu/focus/index.html Report of the Commission for Africa, 2005, see: http://www.commissionforafrica.org/ english/report/introduction.html WTO Hong Kong Ministerial mandate on Aid for Trade: ‘We welcome the discussions of Finance and Development Ministers in various fora, including the Development Committee of the World Bank and IMF, that have taken place this year on expanding Aid for Trade. Aid for Trade should aim to help developing countries, particularly LDCs, to build the supply-side capacity and trade-related infrastructure that they need to assist them to implement and benefit from WTO agreements and more broadly to expand their trade. Aid for Trade cannot be a substitute for the development benefits that will result from a successful conclusion to the Doha Development Agenda (DDA), particularly on market access. However, it can be a valuable complement to the DDA. We invite the Director-General to create a Task Force that shall provide recommendations on how to operationalize Aid for Trade. The Task Force will provide recommendations to the General Council by July 2006 on how Aid for Trade might contribute most effectively to the development dimension of the DDA. We also invite the Director-General to consult with Members as well as with the IMF and World Bank, relevant international organizations and the regional development banks with a view to reporting to the General Council on appropriate mechanisms to secure additional financial resources for Aid for Trade, where appropriate through grants and concessional loans.’ WTO Hong Kong Ministerial Declaration, para. 57. WT/MIN(05)/DEC. 22 December 2005.

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The report of the Task Force on Aid for Trade emphasised that Aid for Trade financing be ‘additional, predictable, sustainable and effective’ (WTO 2006). In all, the report outlined 32 recommendations for the WTO, donors and beneficiaries to implement to fulfil trade-related needs and monitor the progress of Aid for Trade activities. In October 2006, the WTO General Council accepted the Task Force report and the WTO Director General emphasised the WTO’s role in promoting coherence through monitoring Aid for Trade. This would build on the existing OECD/WTO database, but the WTO would also use direct reports from donors and beneficiary countries to the Committee on Trade and Development. The OECD has now taken responsibility for defining and compiling data on Aid for Trade and the WTO is responsible for annual reviews, the first of which took place in November 2007. According to OECD data, the increase in activity in Aid for Trade is well in line with pledges made by both bilateral and multilateral donors at the time of the Hong Kong WTO Ministerial in December 2005. In 2006, Aid for Trade, from the bilateral and multilateral donors combined, rose to US$ 23 billion in real terms compared with an annual average flow of almost US$ 21 billion over the baseline period of 2002–2005, representing a 10 per cent increase. These figures exclude non-concessional funding from the IFIs which would add a further US$ 10 billion. Germany, the Netherlands, Spain, and Sweden increased their spending on Aid for Trade by 50 per cent while that of the European Union, France, Ireland, Norway, and the United States was one-third higher than baseline. The increase in Aid for Trade over this period took place simultaneously with an increase in overall Official Development Assistance (ODA); social spending also increased and therefore the increase in Aid for Trade does represent additionality (i.e. increased spending on Aid for Trade has not occurred by compromising aid expenditure elsewhere). So far the ‘Aid for Trade initiative can be considered a success’ (Lammersen and Gordon 2008). However, with the financial crisis of 2008, the global economic outlook has changed markedly, and overall development assistance is likely to come under pressure. If the Doha negotiations continue, then the fact that Aid for Trade is an essential condition for some countries will ensure that there is some leverage for the recipients, in contrast to other aid relationships. If the Doha Round fails, then possible pressure to increase Aid for Trade may well diminish (Page 2008).

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Aid for Trade and adjustment Preferences and Aid for Trade Preferential access has become a key issue in terms of multilateral liberalisation. This partly reflects increasing dissatisfaction of those countries excluded from preferences accorded to other countries. But it also reflects fears of the impact of MFN liberalisation on the preference margins currently enjoyed by some developing countries and leastdeveloped countries. Trade preferences remain a key issue in the ongoing negotiations under the Doha Round. Middle-income countries are concerned about the discrimination they face in OECD markets as a result of the better access to these markets granted both to other industrial countries, because of free trade agreements, and to poorer or ‘more preferred’, developing countries. Conversely, LDCs and non-LDC African, Caribbean and Pacific (ACP) countries worry that general, MFN-based liberalisation of trade and the removal of trade-distorting policies in agriculture by OECD countries will erode the value of their current preferential access. Preferences are inefficient mechanisms for transferring resources to poor countries because the cost to consumers and taxpayers in OECD nations is a multiple of any transfer realised and benefits are reduced by rules of origin and the exercise of market power by retailers and importers. An increased allocation of aid to support trade integration can help gradually eliminate the current system of highly discriminatory trade preferences and strengthen a policy bias towards MFN liberalisation and away from preferential trade agreements (discussed in detail in Hoekman and Prowse 2009). Agriculture in particular is highly distorted and segmented by the existence of various trade agreements, and preferential tariff rates and/ or market access conditions, which are offered on a reciprocal or nonreciprocal basis only to a subset of partner countries. With such a wide array of preferential bilateral tariffs in place in many low-income countries, the trading system in agriculture is non-transparent, discriminatory and highly distorted (Chauffour 2008). In 2005, a study for the Swedish Government looking for new forms of special and differential treatment that could offer developing countries real gains in trade (Kleen and Page 2005) concluded that ‘some countries will have a measurable negative outcome from any significant liberalisation of trade, predominantly in agricultural products, including in particular, sugar and

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bananas because their losses from preference erosion will be greater than their gains from other parts of the agreements, so that only financial assistance can give them a positive outcome’. Preferences also create perverse incentives to resist the global, MFN-based reforms that are critical for non-preferred or less-preferred developing countries. The price of defending preferences is continued protectionism in rich countries. A distorted global trading system compromises development assistance elsewhere. For example, liberalisation of agricultural import tariffs and abolition of export subsidies by the European Union is estimated to yield annual gains of US$ 2 billion in Argentina, an increase that would increase living standards there by 1 per cent (Hoekman and Martin 1999). In terms of impact on poverty, both national and foreign trade reforms could significantly reduce poverty in Argentina, but foreign reforms are more important (Porto 2004). MFN liberalisation plus appropriate support for adjustment and integration is thus a far better path for the world as a whole. Aid is a more efficient instrument (than preferences) to provide assistance.

Fiscal and macroeconomic impact Trade liberalisation in developing countries may well lead to fiscal and trade deficits and perhaps balance of payments difficulties. The evidence suggests that tariff revenues depend on the structure of the tariff and customs regimes. Average trade tax revenues represent around 20 per cent of total revenues in the average low-income country and as much as 50 per cent of revenues in the most tariff-dependent countries; this compares with less than 1 per cent for high-income countries (Kowalski 2005). The Commission for Africa (2005) and IMF (2005) came to similar conclusions. They reported trade taxes representing one-quarter to one-third of total tax revenue in some lowand middle-income developing countries. Mobilising alternative sources of revenue is therefore important in countries, particularly low-income countries, in which tariff revenues constitute a significant component of total public sector resources. Generally, revenue recovery requires a committed and continuous effort to broaden the tax base by eliminating exemptions, simplifying rate structures, improving administration and strengthening domestic consumption taxes, such as excise or value-added taxes. Middle-income developing countries as well as several low-income developing countries (for example Pakistan and Uganda) have largely succeeded in recovering tax revenue lost from reducing trade taxes. Their experience suggests that supporting reform of the domestic tax system is

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better undertaken in parallel with trade reform, and not necessarily delayed until afterwards, in order to increase the credibility of the liberalisation process and reduce the likelihood of a reversal. Many low-income countries impose tariffs on basic food staples, both to encourage domestic production and boost domestic revenues. With the rapid rise in prices, reducing tariffs and taxes has provided some relief to consumers, but for many this has been at a fiscal cost. The revenue loss from tariff reduction plus the increased expenditure on social protection has had budgetary implications. Increasing financial budgetary support may well be appropriate in a number of country contexts to help overcome the fiscal implications. Direct social protection projects can also help low-income countries in particular where social insurance and adjustment assistance mechanisms are weak or do not exist, or, if they do exist, provide only partial compensation for the adjustment-related losses incurred. Trade reform in agriculture and supply-side support in many cases may need to be accompanied by efficient policies to protect the poorest with targeted cash transfers. Trade policy is generally a very ineffective instrument to address income distribution or to ensure food security and rural development. It not only distorts consumption and production decisions, but the distributional consequences of protecting agriculture tend to harm poorer urban households and those that are net consumers and do not derive an income from agriculture. But for trade reform to be successful (both in delivery and in terms of political economy) requires complementary domestic policies to support increased agricultural productivity and investment in technology including linking rural communities to markets and providing sufficient social safety nets.

Trade reform and facilitating agricultural trade in developing countries Trade reform and improved market access in and of itself will not ensure optimal outcomes. Improved market access without the capacity and transportation to sell is not much use. The constraints to the domestic supply response are the main reason for the lack of trade growth and diversification in many of the poorer developing countries. Without action to improve supply capacity, reduce transport costs from remote areas, increase farm productivity through extension services, and improve the investment climate, trade opportunities cannot be fully exploited and the potential gains from trade will not be maximised (Hoekman and Olarreaga 2007).

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Research by the United Nations Conference on Trade and Development (UNCTAD 2004) estimated that international transport costs for imports to landlocked African countries account for an average of 20.7 per cent of the value of the imports – a much higher figure than the world average of 5.1 per cent and the average for African countries of 12.7 per cent. UNCTAD notes that access to frequent, reliable, low-cost liner shipping services largely determines a country’s connectivity to overseas markets and thus its competitiveness in global markets. For many low-income developing countries, transport and logistical costs are often a more important component of total costs of trade than tariff barriers. With appropriate support many developing countries could reduce the price of imported agricultural products and enhance export potential through trade facilitation measures. This is particularly true for landlocked countries, and notably those in Africa, where land transportation adds significantly to logistics costs (typically US$ 10 cents per tonne and kilometre) (Maur 2008). This could potentially double shipping charges from overseas sources, which for high volume, relatively lowvalue goods (notably agricultural-based products requiring inputs of grains and edible oils) could represent a significant part of the final price to consumers. Although countries have little ability to reduce international shipping costs, there is considerable scope to support countries to improve the efficiency of their supply chain and to help in the broader facilitation issues that affect the price and the availability of food deliveries. According to the World Bank’s Logistics Performance Index, customs clearances, logistics, and competence of supporting services are particularly poor in low-income countries. The logistics costs could amount to 50 per cent of the import value, compared with the OECD benchmarks of around 9 per cent. The combined impact of trade-distorting agricultural policies has been to significantly undermine the efficiency of agricultural production globally and of developing countries in particular. The highly subsidised and protected agricultural production in developed countries has been at the expense of investment in broadly more efficient production in developing countries. Consequently world food prices have been kept artificially low with correspondingly low returns on investment and very thin and highly volatile markets. Investment in agriculture by donors in low-income countries has been correspondingly affected. Investing in agriculture is considered key to reducing poverty and hunger in developing countries and is an essential

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component in addressing the impact of higher food prices in developing countries, notably low-income countries. It is estimated that in subSaharan Africa, governments and development partners will need to increase their agricultural spending considerably in order to achieve the Millennium Development Goals. The estimated incremental annual investments required in sub-Saharan Africa range from US$ 3.8 billion to US$ 4.8 billion; this is in addition to sub-Saharan African countries committing 10 per cent of their budget to agriculture (Fan & Rosegrant 2008).

Policy conclusions The impact of the upward trend and spike in food prices will not only vary considerably between countries, but domestic policy implementation and capacity constraints will determine differing approaches to changes in food prices. The very nature of periodic food crises, concerns over food security, and the immediate distributional impact, may well reverse recent gains in reducing malnutrition and increase the risk of civil unrest. This will require responses that are grounded by both shortto-medium- and long-term considerations. Of particular importance is to craft measures to address the short-term impact in such a manner that they do not significantly undermine medium-term to longer term policy solutions to increase production and productivity. Again the game plan will differ between countries. International support will need to be tailored to country requirements. Just as important (and arguably more so, given increased domestic flows to agriculture from the private sector and non-traditional sources) is the need for the international community to strengthen and reinvigorate global cooperation and international support structures that will provide a more enabling system and a less distortionary environment for the agricultural production sector. The web of subsidies, domestic support mechanisms, protection through trade and non-trade measures, export bans, and a host of other interventionist measures (both in developed and developing countries) has, in global terms, made agriculture the most highly distorted sector. Added to the above, financial markets have capitalised on market weakness and regulatory arbitrage, with price volatility exacerbated by increased speculative capital from non-commercial traders being channelled into international agricultural commodity markets. This has only served to further distort the flow of price and market signals to producers

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and has imposed ‘enormous efficiency’ losses on the global food system, hitting the poorest countries and people hardest (von Braun and Torero 2008). Against these malfunctioning international structures, efforts to mitigate the current trends in food prices will continue to be undermined. As a consequence of the rise in food prices, countries are already in the process of reverting to the food policies of the 1970s, i.e. those of food self sufficiency at any cost, costly strategic grain reserves and reversal of diversification policies, which inevitably will only exacerbate and be further detrimental to both poverty alleviation and food security, as well as leading to environmental degradation (World Bank 2008c). Progressive liberalisation (to include disciplines to limit export bans and tariffs on imports of bioethanol) on a multilateral basis would provide a far more efficient and robust international agricultural sector, made possible by effective international assistance that is reliable and responsive to exogenous shocks. For low-income countries, freer markets will provide higher real incomes – as other non-food distortions are removed – as well as the benefits of diversification into non-food agriculture. Short-term measures to ameliorate exogenous food price shocks (including those associated with trade measures) continue to be provided on a best endeavour basis. Food aid in kind, which still makes up a large proportion of total assistance, is highly distortionary. Consequently countries understandably have little confidence in international support systems. This lack of confidence hugely compromises future progress on agricultural trade reform. Moreover, an adequate response needs to be considered in the context of the ‘right to food for the truly needy’. The time has come for a serious reflection on the need for a cash-based, ex ante determined, international support facility that is responsive to exogenous shocks in prices of global food staples, and to malnutrition and famine indicators, and that is not linked to trade liberalisation in agriculture.

References Capra International 2003. Evaluation of the Revamped Integrated Framework for Trade Related Technical Assistance to the Least Developed Countries. Ontario, Canada: Capra International. Chauffour, J. P. 2008. ‘Global Food Price Crisis: Trade Policy Origins and Options’, World Bank: Trade Note 34. Commission for Africa 2005. Our Common Interest. Report of the Commission. London: Commission for Africa.

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Elliot, Kimberley Ann 2006. Delivering on Doha: Farm Trade and the Poor. Washington, DC: Peterson Institute for International Economics and Center for Global Development. Fan, S. and Rosegrant, Mark W. 2008. ‘Investing in Agriculture to Overcome the World Food Crisis and Reduce Poverty and Hunger’, International Food Policy Research Institute: Policy Brief 3. Foreman-Peck, James 1983. A History of the World Economy. London: HarvesterWheatsheaf Books. Hewitt, Adrian and Gillson, Ian 2003. ‘A Review of the Trade and Poverty Content in PRSPs and Loan-Related Documents.’ Report for Christian Aid. London: Overseas Development Institute (ODI). Hoekman, B. and Olarreaga, Marcelo (eds.) 2007. Global Trade and Poor Nations: The Poverty Impacts and Policy Implications of Liberalization. Washington, dc: Brookings Institution Press. Hoekman, B. and Prowse, S. 2009. ‘Economic Policy Responses to Preference Erosion: From Trade as Aid to Aid for Trade’, in Hoekman, B., Martin, W. and Braga, C. A. (eds.), Trade Preference Erosion Measurement and Policy Response. New York, NY/Washington, DC: Palgrave Macmillan and World Bank. Hoekman, B. and Martin, Will 1999. Some Market Access Issues for Developing Countries in a Millennium Round: Results from Recent World Bank Research. Cuadernos de Economia 36: 947–78. IMF 2005. www.imf.org/external/pubs/ft/wp/2005/wp05112.pdf. Ingco, M., Mitchell, D. and Nash, John D. 2004 ‘Food Security and Agricultural Trade Policy Reform’, in Ingco, M. and Nash, John (eds.), Agriculture and the WTO: Creating a Trading System for Development. Washington, DC and Oxford: Oxford University Press and World Bank. Kleen, P. and Page, Sheila 2005. Special and Differential Treatment of Developing Countries in the World Trade Organization. Stockholm: Ministry for Foreign Affairs. Global Development Studies No. 2. Kowalski, P. 2005. ‘Impact of Changes in Tariffs on Developing Countries’ Government Revenue’, Paris: OECD Trade Policy Working Paper No. 18. Lammersen, F. and Gordon, Ann 2008. ‘OECD Policy Dialogue on Aid for Trade – 2006 Aid for Trade Flows. Data Analysis’, Paris: OECD. Levy, S. and Wiggins, Steve 2008. ‘Rising Food Prices: A Global Crisis: Action Needed Now to Avert Poverty and Hunger’, Overseas Development Institute, Briefing Paper 37. Mattoo, A., and Subramanian, Arvind 2009. ‘From Doha to the Next Bretton Woods: A New Multilateral Trade Agenda’, Foreign Affairs 88: 15–26. Maur, Jean Christophe 2008. ‘Regionalism and Trade Facilitation: A Primer’, Journal of World Trade 42: 979–1012. Njinkeu, D. and Cameron, H. (ed.) 2007. Aid for Trade and Development. Cambridge University Press.

responses by trade and aid community to food security 295 Page, Sheila 2008. ‘Aid for Trade and the WTO’ (mimeo). Polaski, Sandra 2008. ‘Rising Food Prices, Poverty and the Doha Round: Policy Outlook’, Carnegie Endowment for International Peace. Porto, Guido G. 2004. Trade Reforms, Market Access and Poverty in Argentina. Washington, DC: World Bank. Price, H. B. 1955. The Marshall Plan and its Meaning. Ithaca, NY: Cornell University Press. Prowse, Susan 2006. ‘Aid for Trade: Increasing Support for Trade Adjustment and Integration – A Proposal’, in Evenett, S. and Hoekman, B. (eds.), Economic Development and Multilateral Trade Cooperation. New York, NY and Washington, DC: Palgrave Macmillan and World Bank. Spence, M. 2008. Report of the Growth Commission. Washington, DC: World Bank. Subramanian, Arvind. 2008. Statement before the U.S. House of Representatives, Committee on Financial Services, Hearing on Contributing Factors and International Responses to the Global Food Crisis, May 14. UNCTAD 2004. Report on the Least-Developed Countries. Geneva: United Nations Conference on Trade and Development. Verdier, Thierry 2005. ‘Socially Responsible Trade Integration’, in Bourguignon F., Pleskovic B. and Sapir A. (eds.), Are we on Track to Achieve the Millennium Development Goals? Proceedings of the Annual Bank Conference in Development Economics. Washington, dc and Oxford: World Bank and Oxford University Press, pp. 61–111. von Braun, J. and Maximo, Torero 2008. Physical and Virtual Global Food Reserves to Protect the Poor and Prevent Market Failure. International Food Policy Research Institute. Wiggins, Steve 2008. ‘Is the Global Food System Broken?’ London: Overseas Development Institute (mimeo). World Bank 2004. ‘The Poverty Reduction Strategy Initiative: An Independent Evaluation of the World Bank’s Support through 2003’, Washington DC: Operations Evaluation Department. World Bank and International Monetary Fund 2005. ‘Aid for Trade and the Doha Development Agenda’, DC 2005–0016 (http://siteresources.worldbank.org/ DEVCOMMINT/Documentation/20651864/DC2005–0016(E)-Trade.pdf) (accessed March 2009). World Bank 2007. ‘World Bank Assistance to Agriculture in sub-Saharan Africa’, Independent Evaluation Group of the World Bank, Washington, DC. ——2008a. World Development Report: Agriculture for Development. Washington, DC: World Bank. ——2008b. ‘Rising Food Prices: Policy Options and World Bank Response’, mimeo – background note for discussion of recent market developments at the Development Committee meetings (April).

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——2008c. ‘Global Food Price Response: Work Program to Address Key Analytical, Knowledge and Policy Gaps’, Office Memorandum May 7. WTO 2001. Doha Declaration. WT/MIN/01/Dec/1. ——2006. Recommendations of the Task Force on Aid for Trade, WT/AFT/1. Zedillo, E. 2005. ‘Strengthening the Global Trade Architecture for Economic Development: An Agenda for Action’. Policy Brief, New Haven, CT: Yale Center for the Study of Globalization (www.ycsg.yale.edu/focus/gta/ GTA_policy_brief.doc) (accessed March 2009).

12 Food security and WTO rules christian h Ä berli* 1.

Introduction

Food security for the solvent part of the population is essentially achieved through production and trade. Trade regulation cannot solve food crises, but it enhances or reduces the contribution of trade to food security. This chapter therefore looks at agricultural and trade policies at the national levels and their impact on the multilateral trading system. Many agricultural trade and production policies implemented by rich countries, such as market access restrictions and subsidies of various types, constitute disincentives to food production by and for the poor – especially in the food-importing developing countries themselves. As for the multilateral trading system, the World Trade Organization (WTO) is first and foremost about trade liberalisation. The 2008 food crisis has shown that the present multilateral trade rules contribute little or nothing to global food security. This is because, although the results of the Uruguay Round were a step in the right direction, the new rules and commitments hardly changed anything in terms of actual market access opportunities. A first analysis of the July 2008 proposals on the Doha negotiating table shows that the global food security situation could actually improve if the envisaged set of new disciplines and numbers is implemented. However, new rules on several key elements such as export restrictions and food aid are still extremely vague. The conclusions suggest a number of policy and trade rule reforms by which the multilateral trading system could improve global food security in a more substantial way. Other chapters of this book have identified a number of policy failures at the national level which exacerbate the cyclical factors prevalent in all food crises.1 This chapter mainly deals with ‘WTO policy homework’, i.e. the international regulatory changes which are needed to enable trade * Senior Research Fellow, World Trade Institute, University of Bern, Switzerland. 1 Schiff and Valdes from the World Bank produced a very long list of such policy failures back in 1992 (pp. 4–30).

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to better play its role in global food security, taking into account the structural factors in the 2008 food crisis. The food crisis in early 2008 has indeed highlighted in a dramatic fashion the need for the multilateral trading system to review its past, present and future role in a wider context of food security. While a food crisis cannot be solved by regulatory changes in the multilateral trading system, the hypothesis here is that the WTO could make a significant contribution to the efforts to improve food security in low-income countries. The current, internationally most widely used definition of food security was laid down at the Food Summits in 1996 and 2001: ‘Food security, at the individual, household, national, regional and global levels is achieved when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life.’2 For the purposes of this chapter I will define food security as ‘continuing access, by way of either domestic production or trade, to quantitatively and qualitatively adequate food, including for the poorest segments of the population, both with and without purchasing power’. Food security in this sense is principally a matter of availability and price. In principle, higher prices increase availability but reduce demand; especially for the urban poor, this may involve belt-tightening and reduced consumption of other essential goods such as health, housing and education. Some of the cyclical factors have gone into reverse gear, and as a result food prices considerably decreased after January 2008 (albeit remaining way above long-term averages). Even so, most analysts agree that the upward pressure on food prices is likely to continue because of the new, structural price drivers such as income growth in East and South Asia, and biofuels. In order to determine the role that WTO – as a trade organisation – can play, it is necessary to first describe the impact of agricultural and trade policies of exporters, and the policy responses in those importing countries which have been particularly affected by the food crisis (Section 2). Sections 3 and 4 then analyse, respectively, the benefits and shortcomings of the Uruguay Round in the context of the food crisis, and the contribution that the Doha Development Agenda (DDA) could make to more sustainable food security. Section 5 contains policy conclusions and recommendations.

2

Cf. FAO 1996; amendment in italics from FAO 2002.

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2. Agricultural and trade policies at national level Agricultural and trade policies in rich countries The trade impact of agricultural policies has been well documented by numerous studies, including those of the World Bank (International Bank for Reconstruction and Development, IBRD)3 and the Organisation for Economic Co-operation and Development (OECD).4 For decades, taxpayers in rich countries have subsidised domestic farm production. When the fundamentals turned, many such support instruments were reduced in size or terminated. It could be argued that some of these policy changes actually accelerated the commodity price turnaround: (1) During the 2007 food price spike, volumes of international food aid reached a historically low level – perhaps the most cynical proof of the non-genuine nature of many previous forms and levels of aid (see Figure 12.1). (2) Export subsidies and other forms of taxpayer-funded export competition such as export credits also went down. This obviously increased import prices in the markets concerned. (3) Biofuels subsidies increased to US$ 7 billion in the US and € 3.5 billion in the European Union (EU); such subsidies clearly displace imports – especially since there were no corresponding reductions in ethanol import duties (averaging 25 per cent).5 Moreover, they reduce availability of food crops and thus increase world market prices. (4) Formerly high import duties were reduced in many countries. These tariff reductions lowered import and (it was hoped) consumer prices, but also increased the competition for whatever food was still for sale on world markets. (5) Up to 50 food commodity exporting countries took ‘self-security’ measures which included export restrictions, prohibitions, and differential export taxes. These moves exacerbated world market price increases.

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Under the programme on ‘Distortions to Agricultural Incentives’ led by Kym Anderson a wealth of World Bank studies and statistics has been collected on this issue. The programme and the publications list can be found at www.worldbank.org/agdistortions (accessed 7 January 2009). Chapters 2 and 7 of this volume contain further references to World Bank publications. See also Anderson et al. 2008. For references see Chapter 5. 5 Cf. OECD 2008.

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Figure 12.1. Wheat food aid deliveries as direct transfers and wheat price (2000–2007) Source: World Food Programme

It can be said that the rapid sequence of these production- and tradedistorting agricultural policies, together with the above-mentioned cyclical and structural market factors, constituted the pernicious price cycle which led to the 2008 food crisis.

Impact on food-importing developing countries When food prices increase, all consumers pay more, and all importing countries face higher bills. Generally speaking, the net food-importing developing countries (NFIDCs) are most affected by such price increases. In the past, export subsidies and international food aid may have benefited the poor and the hungry in developing countries, but producers who did not receive subsidies (not only in the importing countries) were in many instances unable to compete. As a result, production in many developing countries was artificially depressed, and self-sufficiency rates in some countries even declined. Urban consumers became ‘addicted’ to staple food imported cheaply in order to cover a food deficit, in some cases in combination with food aid. At the national level, the soaring import bills caused massive balanceof-payments problems in many NFIDCs. Many countries have reduced

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import duties and value added taxes.6 But because quite a few rich countries also reduced their tariffs, some NFIDCs failed to attract more imports and were left instead with higher fiscal losses. Some are now subsidising staple food for all, or only for the poor, but again with corresponding additional revenue losses and new outlays. Despite these efforts, and because of the decline of international food aid, it is the food buyers, including the rural poor, who have had to pay the heaviest price in the food crisis. Given the world market price increases in 2006–2007, domestic production should have responded in NFIDCs as well. At first glance surprisingly, it appears that the consequences of the food crisis for these producers are almost as bad. Since about 75 per cent of the world’s poor live in rural areas where agriculture is the main economic activity, one might assume that rising food prices would tend to alleviate poverty, because price hikes – if passed on back to the farm – tend to favour the producer. However, the complexity of the situation does not allow for a straightforward conclusion: (1) Even in rural areas most households are net consumers of food and now have to pay more for their food. A substantial proportion of rural households do not sell or buy large amounts so they are somewhat disconnected from price trends. (2) Many small farmers lack the financial, technical and land resources required to increase production, let alone benefit from higher endof-pipe prices. (3) Looking at rural areas only, especially in South Asia, the poorest of the poor tend to be landless agricultural labourers who are also net food buyers. For them, the food crisis often means the continuation of life at subsistence levels instead of an opportunity to increase production and to aim for higher living standards. It is no surprise that after decades of artificially depressed world market prices and declines in Official Development Assistance (ODA) and research and development for agriculture, poor farmers in developing countries now lack capital and the know-how needed to respond to higher food prices. On the basis of this brief description of the impact of agricultural and trade policies on food security, particularly in importing developing countries, we can now turn to the main question addressed by this chapter, i.e. the role of the multilateral trading system. 6

World Bank 2008.

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3.

The Uruguay Round provisions and food security

In its narrow sense WTO is about trade liberalisation as an instrument for economic growth. The question here is whether WTO, through the role it plays in regulating international trade, can also be an instrument for increasing food security – or whether it is actually part of the problem. The Agreement on Agriculture (AoA) which resulted from the Uruguay Round negotiations attempts to establish ‘a fair and market-oriented agricultural trading system’ through ‘substantial progressive reduction in agricultural support and protection’.7 Food security is listed as a ‘non-trade concern’.8 In other words, food security is an objective in the fulfilment of which trade is one of the instruments. This means that one has to analyse the rules and disciplines laid down in the AoA and other relevant WTO agreements in respect of their direct and indirect impact on overall food security, as defined above. The following analysis is based on the legal texts; I will not attempt to quantify the result of the analysis or to provide an economic assessment of the various WTO provisions in a food security context. The focus here is on the so-called three pillars of the AoA, including the translation of rules agreed therein into country schedules. Given the fact that it was intended by some to address food security concerns, the so-called Marrakesh NFIDC Decision also needs be discussed. A few additional disciplines in other agreements should be considered as well: (1) The so-called General Agreement on Tariffs and Trade (GATT) 1994 will be examined for a number of agricultural trade policy measures with a potentially negative impact on food security, such as food export restrictions. (2) The Agreement on Subsidies and Countervailing Measures (SCM) nowadays also applies, to some extent, to domestic agricultural support measures; it is relevant for an analysis of the biofuels support programmes. 7 8

Preamble to the AoA, excerpts from the second and third indent. ‘Noting that commitments under the reform programme should be made in an equitable way among all Members, having regard to non-trade concerns, including food security and the need to protect the environment; having regard to the agreement that special and differential treatment for developing countries is an integral element of the negotiations, and taking into account the possible negative effects of the implementation of the reform programme on least-developed and net food-importing developing countries’ (in Preamble to the AoA, sixth indent; emphasis added).

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(3) The Agreement on Import Licensing Procedures contains important disciplines but as yet little subjected to litigation for the management of tariff-rate quotas. The link to food security, however, is tenuous, so we will not further examine this agreement. Generally, there is still little if any jurisprudence, and even less economic research, on the question of whether and how these disciplines affect food security.

Market access Many developing countries derive substantial earnings from agricultural exports. Their food security grows in parallel with increased market access for their cash crop exports, because their export earnings allow for food procurement at the cheapest, i.e. at world market prices. Countries such as Malaysia or Côte d’Ivoire have for many years enjoyed high levels of food security thanks to their cash crop exports. Between 1990 and 2000, world market shares for quite a few agricultural exports from developing countries increased.9 There were various reasons for these shifts. However, the benefits which food-exporting developing countries could directly derive from new WTO-induced market access appear to be rather limited. Indeed, while the almost 100 per cent ‘tariffication’ (i.e. the transformation of all non-tariff obstacles to market access, such as quantitative restrictions, into new tariff rates) can be considered as the biggest systemic achievement of the AoA, the agreed tariff reductions10 were not sufficient to create new trade opportunities.11 For many markets WTO-bound levels of import protection for agriculture remain high. It is true that there are autonomous tariff reductions (in the form of developing country preferences, or even erga omnes, including as a result of the food crisis). But apart from these unbound tariff reductions, most countries have not significantly facilitated access to their markets which could have boosted agricultural production and export-financed food security in developing countries.12 In addition, a 9 10 11

12

Cf. Exports of agricultural products by region, 2000, in WTO 2001, Table IV.6. For developed countries: −15% as a minimum for each tariff line, and –36% on average. The only major exception was the ‘minimum market access’ provisions ensuring that imports can compete with domestic production, at relatively low (‘in-quota’) tariff rates, for at least 5% of domestic consumption. One window of opportunity in this sense also arises from WTO accessions. Unlike the founding club members of the GATT, countries joining WTO have to bind their most-favoured-nation (MFN) tariffs at very low levels. But here again, only empirical

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quick look at the few ‘North–South’ Regional Trade Agreements reveals that virtually none of them guarantee duty-free quota-free access to markets of rich countries.13 Finally, the Uruguay Round brought no temporary relief, by way of new safeguard clauses, for import-sensitive production in developing countries: the Special Agricultural Safeguard (SSG) which was established to protect against excessive price fluctuations and import surges can be used by only a few, mainly developed, countries (and has been prone to abuse in some such countries). Other special and differentiated treatment (S&D) provisions in the AoA are more of a declaratory language type and can hardly be considered as a binding commitment to food security improvements. Overall, the new market access rules enshrined in the AoA can be considered as a step in the right direction but not as more than a modest, ‘collateral’ improvement to food security. Moreover, in quantitative terms, the tariff reductions and quota commitments can hardly be described as major improvements, especially for newcomers in agricultural trade.

Domestic support Price support has the effect of inducing greater supply than market prices would warrant. It also leads to higher market shares for domestic produce, and it allows for excess production to be sold more easily on world markets, i.e. at prices below net production costs. In short, and just like export subsidies, domestic support in competition terms is ‘a race between finance ministers’. It is true that a 20 per cent reduction of the most distorting forms of support was decided as a part of the Uruguay Round results. But this obligation applied across the board and therefore still allows for massive ‘product support focusing’, another term for market displacement strategies. Moreover, this 20 per cent global reduction was applied to the

13

research will show who is actually benefiting. Given that many of these rates are the result of access negotiations with traditional main suppliers, there is some doubt that newcomers – including developing country suppliers – are making full use of these new market opportunities. The only notable exceptions are the ‘Economic Partnership Agreements’ (EPA) concluded by the EU as successor agreements to the Cotonou Convention. As the EPA have only recently (1 January 2008) and only partially entered into force, their impact on agricultural trade remains to be seen. For an impact analysis of this and other ‘duty-free quota-free’ initiatives on market access of least-developed countries, see Häberli 2008.

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historically high levels of 1986–1988, meaning that most countries had already reduced their expenditures below those levels by the time the AoA entered into force. Two other forms of market-distorting subsidies – the so-called de minimis support programmes, as well as payments provided under production-limiting programmes (blue box) – were even exempted from any reduction commitments. This means that domestic support disciplines in the AoA did not oblige the concerned countries to meaningfully support cuts after 1995, nor did they have to undertake major WTO-imposed farm policy reforms. On the contrary, the possibilities for surplus dumping on world markets including through food aid remained unaffected. This AoA-enshrined feature therefore allowed for a continuous depression of global food prices. At the same time, food-importing countries enjoyed continuous access to cheap food. While such cheaper imports were more than welcome from the perspective of poor consumers, they continued to hurt farmers in those countries who were unable to compete with such imports or with subsidised products thrown on to the world markets. Likewise, even though subsistence and small-scale farmers may have benefited from this dumping for their food purchase needs, their farm produce suffered nevertheless from competition fuelled by taxpayers in rich countries, preventing new investments and technology, or even driving them off the land and into poverty. For these population segments and from a food security perspective, it is clear that the new domestic support caps were a small step in the right direction, but they have changed little if anything in practice. Plainly, the new AoA rules and disciplines did nothing to prevent the 2008 food crisis.

Export competition There are various forms of government support by way of what is called export competition. The Uruguay Round negotiations did produce substantial disciplines for export subsidies, and for the first time put a ceiling on such subsidies.14 But they changed little if anything in export competition in three other forms, namely export credits, export state trading, and international food aid. Moreover, government outlays for marketing 14

The main result for export subsidies in developed countries was the obligation to reduce budgetary outlays (for commodities) by 21%, and quantities (of all agricultural products) benefiting from such subsidies by 36%. See AoA Art. 9.2 lit.b(iv).

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and promotion services, except as a means to reduce selling prices, are even covered by the green box exemption in Annex 2 of the AoA, regardless of whether they are used for domestic or export sales.15 Export subsidies had to be reduced by 21 percentage points in export values – but in many cases the ensuing subsidy reductions happened in anticipation of the AoA-agreed schedule, mainly thanks to rising world market prices, a fact which makes it difficult to attribute market share shifts to the AoA. The most conspicuous lack of disciplines, from a food security viewpoint, relates to international food aid. Obviously, for starving people without money to buy food, such aid is always welcome, and in many instances it can be their only means of survival. In extreme situations, no amount of local production for sale can provide the food security required. At the same time it is recognised that, depending on the circumstances in which food aid is shipped to countries and sold on local markets, it can have negative effects by displacing domestic production or supplies from non-subsidised producers including neighbouring developing countries. Food security, in cases where non-subsidised production and trade could make a contribution, is actually diminished because of its price-depressing effect, especially when local production as a source of revenue is being displaced. It is acknowledged that the target of WTO disciplines, as instruments of trade liberalisation, should be only the market displacement aspect of food aid: this is the non-genuine and trade-relevant aspect of food aid which could (and should) be addressed directly. This being said, the failure of the Uruguay Round negotiators to even contemplate disciplines for ‘non-genuine’ food aid must be seen as a serious shortcoming from a food security perspective. This is conspicuously evident when looking at the development of food aid volumes during times of low and high food commodity prices. Indeed, in parallel with the unprecedented price increases in 2007, food aid was reduced to its lowest level ever.16 This fact demonstrates the truly vicious face of an instrument used first and foremost for surplus dumping, rather than for the fight against hunger and starvation. Summing up, new disciplines on export competition were a major achievement of the Uruguay Round for the benefit of agricultural trade liberalisation – but, especially in times of high food prices, they are a 15 16

AoA Annex 2, Art. 2 lit.f. WFP 2008; see above, and the graph from that report in the Annex to this volume.

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blunt instrument for improving food security. Moreover, with only export subsidies being reduced, and all other forms of export competition remaining basically untouched, this pillar of the AoA is not only incomplete and unbalanced; it has even had negative effects on food security, especially through its lacuna on international food aid disciplines.

The Marrakesh Ministerial Decision on measures concerning the possible negative effects of the reform programme on leastdeveloped and net food-importing developing countries (NFIDCs) The rules and disciplines in the AoA (also called the ‘reform programme’) were supposed to be accompanied by measures for mitigating the possible negative impacts of trade liberalisation. Paragraph 2 of the so-called Marrakesh Decision, adopted as a part of the Final Act embodying the results of the Uruguay Round, recognises that the agricultural reform process may have negative effects on the ability of NFIDCs to finance normal levels of commercial imports of basic foodstuffs,17 and that appropriate compensation measures should be established.18 The Decision lists four possible response mechanisms: (1) food aid;19 (2) short-term financing of normal levels of commercial imports;20 (3) financial assistance to improve agricultural productivity and infrastructure;21 (4) favourable terms for agricultural export credits. At first glance it appears that none of these instruments are really within the realm and competence of the WTO. However, the language on export 17

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‘Ministers recognize that during the reform programme leading to greater liberalization of trade in agriculture least-developed and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including shortterm difficulties in financing normal levels of commercial imports of basic foodstuffs’ (para. 2). ‘Ministers accordingly agree to establish appropriate mechanisms’ (para. 3). ‘…to establish a level of food aid commitments sufficient to meet the legitimate needs of developing countries during the reform programme’ (para. 3(i)). ‘Ministers recognize that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established’ (para. 5). See para. 3(iii).

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credits points directly to a DDA issue: paragraph 4 of the Ministerial Decision seems to indicate that new disciplines on export credits resulting from the DDA negotiation will have to leave exporting countries free to continue providing such credits, at least to least-developed and NFIDCs.22 In Section 4 I examine whether that provision has opened a loophole for disciplines resulting from the Doha Round. What can be said here is that, in terms of food security, export credits can negatively affect domestic production. But if they are for food in countries with little or no domestic production of such food commodities (or their substitutes), export credits could be seen as increasing food supplies, including for the poor, without damaging the interests of local farmers. It has been argued that, if properly implemented, the Decision might have provided some relief to the countries affected by food crises induced by trade liberalisation measures. But whether or not the four instruments envisaged are within WTO’s realm, and regardless of the impact they might have had under certain circumstances, the fact remains that no concrete measures were ever adopted. This might be because the causal link between changes in world trade and food security, and the usefulness of these measures, could not be established. A number of proposals on implementation were made in the WTO Committee on Agriculture by countries such as Cuba, Egypt and Kenya, but none of them ever received any meaningful support from the rest of the Membership. And to nobody’s surprise, when the 2008 food crisis made headlines, there was no recourse, in fact not even a reference, to the Marrakesh Decision. This decision must therefore be considered as a piece of political expediency with no chance of making a contribution to improvements in food security. We now can turn to the question of whether the next chapter in trade liberalisation, expected to result from the Doha Development Agenda negotiations, could improve food security.

4.

Would the Doha Round results, as currently envisaged, improve or diminish food security?

Before an analysis of the July 2008 Draft Modalities, two preliminary remarks might be in order.23 22

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‘Ministers further agree to ensure that any agreement relating to agricultural export credits makes appropriate provision for differential treatment in favour of leastdeveloped and net food-importing developing countries’ (para. 4). WTO 2008a, hereinafter referred to as ‘Draft Modalities’. WTO 2008b is hereafter referred to as ‘December 2008 Draft Modalities’.

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(1) Timelines: even if it is concluded soon, a Doha Round settlement would have no direct immediate impact on food prices and production. Tariff changes and other rules of a final deal would not take effect for several years. This is because the new agreements will first have to be ratified by Members and enter into force, and because the implementation period is likely to extend over five or six years for developed countries. Clearly, the implications of the DDA for food security depend very much on future market conditions. Needless to say, food security will also be determined by the type and size of any measures accompanying this next step of the ‘reform programme’.24 (2) The development dimension of the Doha negotiations: besides the specific ‘reduced constraints’ on market access examined below, certain categories of countries, almost exclusively developing ones, would benefit from a variety of additional options for leeway reflecting their specific situations. These are (i) ‘recently-acceded Members’,25 (ii) ‘commodity-dependent producing country Members’,26 (iii) countries benefiting from long-standing preferences and threatened by what is called ‘preference erosion’,27 (iv) ‘least-developed countries’ (LDCs) (exempt from all new disciplines),28 (v) cotton-producing developing countries,29 (vi) small, vulnerable economies.30 This list raises the question of whether the exceptions and special benefits foreseen in the Draft Modalities for these categories of countries improve food security. They certainly provide the countries concerned with ample ‘policy space’. It is then a matter of national priorities and policy decisions whether to use this ‘constrained flexibility’ to the benefit of consumers or producers. But it also makes a quantitative assessment of the implications for food security of the Draft Modalities all the more difficult. Nevertheless, on the assumption that the fundamental parameters of the present food crisis will not change substantially, it is possible to tentatively assess those results which appeared ‘doable’ in July 2008, 24 26 28 29 30

Art. 20 AoA. 25 Draft Modalities, paras. 9, 19, 33, 51 and 66–70. Draft Modalities, paras. 88–99. 27 Draft Modalities, paras. 140–141. Draft Modalities, paras. 142–144. Draft Modalities, paras. 54–58, 145–146 and 158–159. Draft Modalities, paras. 147–149 and Annex I.

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before the talks broke down, for their medium- and long-term implications for food security, in other words for a better-functioning international trading system that helps to avoid the recurrence of such types of crises in the future. This preliminary analysis of Doha results again examines the proposals made for each of the three pillars, before addressing export restrictions as the major missing piece in the food security puzzle. However, since many parameters and key reduction percentages have not been agreed, including the crucial question of exceptions and that of special and differentiated treatment, it does not attempt to quantify the impact of the Draft Modalities on food security.

Market access When the food crisis broke out, numerous countries reduced or even abolished import duties for many staple food commodities, as well as for feed. It would appear that MFN tariff cuts should be easier to agree when applied rates are low. The reason is that when such cuts do not reduce applied rate levels they will not change actual conditions of competition. As has been pointed out in the Doha negotiations by countries like Indonesia, they do, however, lock in the ‘policy space’ for future border protection. Lower tariffs benefit consumers in all countries. Generally speaking, food security is likely to increase if and when markets are more fluid, because solvent consumers, at least, can more easily obtain the cheapest available food. As for the food producers, the reform process (and possibly also aid for trade measures) will influence their response capacity. When such lower tariffs are bound in WTO schedules they also give market operators and investors a longer-term perspective on which to base their decisions. In this context, the future border protection in NFIDCs plays a very important role. In July 2008, the most important result of the whole Doha Round almost emerged as a consensus, although accompanied by numerous cross-conditions: the reduction rate for the highest tariffs (defined as 75 per cent or higher ad valorem) in industrialised countries was to be between 66 and 73 per cent (with only two-thirds of this rate proposed for developing countries, and no compulsory reductions at all for LDCs).31 However, this and other formulas connected to the main 31

Draft Modalities, para. 61.

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result were to be accompanied – many would say weakened – by three inroads already envisaged in such market openings as would result from full tariff cut benefits. All of these three key negotiating elements are also relevant from a food security perspective: (1) Both developing and developed countries will be able to designate ‘sensitive products’ for which tariff cuts will be more lenient than required by the formula; in exchange, developed countries (and perhaps some developing ones too) will have to increase tariff ratequotas (TRQ). This formulation not only implies a reduction of trade liberalisation benefits (albeit carefully calculated and thus more predictable than ‘simple’ tariff reductions). It also protects less competitive domestic producers. This could be considered as a short-term improvement of domestic food security especially in NFIDCs. However, shielding staple food from foreign competition may also inhibit structural reform in the existing production systems, perhaps by maintaining the very same inefficiencies which caused the food security problems in the first place. (2) ‘Special products’ will be self-designated by a developing country as being particularly important to its overall development because of their significant role in enhancing ‘food security, livelihood security and rural development’.32 These products will be exempted from the full extent of the tariff reductions to be agreed (and may not even have to undergo TRQ increases). Again, the security of local producers should increase, but the price of their lack of international competitiveness will have to be paid by local consumers. (3) Developing countries will also gain recourse to a new ‘Special Safeguard Mechanism’ (SSM) based on import quantity and price triggers to protect them against price slumps and import surges.33 At the WTO Mini-Ministerial in July 2008 no agreement could be reached on the SSM trigger and the extent to which developing countries would be able to raise tariffs to protect farmers from import surges.34 According to press reports, the SSM even emerged as a major stumbling block for the whole DDA negotiation. At any rate, the food security implications of this mechanism look like being the same as for the ‘special products’, because when local producers enjoy more border protection, consumer prices are likely to increase to the extent of foreclosure from foreign competition. 32 34

Draft Modalities, para. 120. WTO 2008c, para. 16.

33

Draft Modalities, paras. 123–137.

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As formulated in July 2008, the Doha Draft Modalities for market access fully reflect the dilemma of most trade negotiations. On one side, acrossthe-board MFN tariff reductions are the best way to increase competitive trade. According to the calculations of the World Bank and others, it is the so-called South–South trade which offers the biggest potential for trade expansion based on DDA results.35 On the other side, constraining MFN results also reduces what import-sensitive governments call their ‘policy space’, including that for protecting their small farmers as one of the most vulnerable population segments. It should be recalled that poorer countries have little choice other than to use border protection as a tool for protecting small farmers. But this may not be the case for other developing countries whose agricultural exports are an important means of both economic development and feeding their own poor. As the profound divergences between the different developing countries in the Doha negotiations showed, there is no single solution to this dilemma. In our view only a comprehensive package addressing both interests – more market access, and more ‘policy space’ – can assist the progressive reform process necessary in most countries, including carefully targeted solutions for special products and safeguards, as well as accompanying measures and binding aid for trade guarantees. It would be bad both for the overall economy and for food security if the leeway granted by the new market access conditions were used to protect parochial interests rather than to improve the supply of food to needy consumers.

Domestic support The new disciplines envisaged under the July 2008 proposals again appear quite ambitious, especially when compared with all previous negotiating rounds. The EC, the US and Japan, as the biggest spenders in absolute terms, would reduce their overall trade-distorting domestic support (OTDS) by between 66 and 85 per cent.36 There is also a ‘down payment’ of one-third on the first day of implementation.37 Developing countries and recently acceded Members will have to reduce at lower percentage rates, while LDCs are completely exempted from such obligations. What does this mean for food security? Reducing producer support by the taxpayer increases food prices for the consumer, at least in the short run. But this is seen as a necessary 35 36

Anderson (ed.) 2009, Helble et al. 2007; see also Chapter 2. Draft Modalities, para. 3. 37 Draft Modalities, para. 5 lit.a.

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correction to global agricultural market distortions and an essential part of any Doha results if non-subsidising countries are to be given a chance to improve their agricultural sectors based on less distorted market signals. However, given that the presently applied levels of domestic support in most countries are very low, the immediate impact on world food prices is likely to be small, at least if the Doha Round is concluded while commodity prices are high. Nevertheless, in the medium and long term, disciplining rich country farm support will allow poor countries to compete on a more level playing field and thus increase domestic food supply. According to the negotiation proposals, the existing green box disciplines in the existing AoA on Public Stockholding for Food Security Purposes could be relaxed, making the conditions for stockholding and related public food distribution programmes less stringent, at least for developing countries. Regional schemes co-financed by developed countries, as proposed by Japan, may add to overall food security. For such measures another slight revision of paragraph 3 in Annex 2 of the AoA may be necessary. However, there have been no actual negotiations on such schemes, despite several proposals and declarations of intent, for instance in the G8.38 However, in terms of food security the July 2008 Draft Modalities also contain three systemic flaws: (1) In order to prevent ‘product support focusing’ it is proposed to limit spending levels for each commodity.39 Systemically this is a major step forward in comparison with the present AoA. However, the July 2008 proposal would introduce such product-specific support caps only at base period levels. This means that these presently low levels can be increased again, and that producers in developing countries without such support would still face the possibility that the governments of rich countries could concentrate support on certain commodities, including food-security-sensitive products such as rice or maize. 38

39

G8 Hokkaido Toyako Summit, 7–9 July 2008: G8 Leaders Statement on Global Food Security, para. 6 in fine: ‘We also call for countries with sufficient food stocks to make available a part of their surplus for countries in need, in times of significantly increasing prices and in a way not to distort trade. We will explore options on a coordinated approach on stock management, including the pros and cons of building a “virtual” internationally coordinated reserve system for humanitarian purposes.’ (Quoted from the website of the Ministry of Foreign Affairs of Japan, retrievable at www.g8summit.go. jp/eng/doc/doc080709_04_en.html (accessed on 16 October 2008)). Cf. Draft Modalities, paras. 21–26.

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(2) Present WTO disciplines governing the production of and trade in biofuels, particularly under the AoA and the SCM, leave considerable room for ambiguity and incoherence in policy responses by WTO Members. The Draft Modalities on the table do not address this issue. Whether or not this is part of the DDA, from a food security perspective biofuels disciplines are clearly needed. For some markets, biofuels could buttress a floor price, encouraging more food production – but not through trade-distorting subsidies. The results of the Doha Round could contribute, for instance by prohibiting biofuels subsidies in rich countries at least for staple food crops and their substitutes. (3) From a food security perspective a simple shift from the present subsidies to production-limiting or fully decoupled direct payments will not help, even if such payments fully qualify under the green box provisions. As a matter of fact, farmers in rich countries with taxpayer support can and will continue to depress world food prices, including otherwise viable staple food production in poor countries. From a food security perspective the July 2008 proposals pertaining to domestic support – despite their overall ambition in quantitative terms – clearly leave room for improvement. In particular, stringent disciplines are still lacking for staple food subsidies in rich countries; as for biofuels produced from such commodities and their direct substitutes, there should even be a complete prohibition of such subsidies. In the longer term, and as a contribution to the Millennium Development Goal of halving the number of hungry people by 2015, the 2008 food crisis should instead lead to a discussion on new ways of ensuring food security, along the lines of the proposals outlined above, and, including through financial mechanisms, bringing food to the truly needy of this world.

Export competition Export subsidies Export subsidies would be eliminated by the end of 2013 (later for developing countries). This (conditional) commitment, and new disciplines on export credit guarantees and insurances and on exporting state trading enterprises are all likely to have the same positive (albeit long-term) impact on food security as domestic support reductions. This being said, negotiators, especially from NFIDCs, will be well advised to carefully analyse these proposals from a longer-term food

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security perspective. Looking at how fast export competition measures including food aid and export credits dwindle in times of high prices, they may reconsider their present taste for foreign-subsidised food imports.

Export credits The July 2008 Draft Modalities pertaining to export credits seem to focus primarily on the repayment period which, for LDCs and NFIDCs, can be extended to (at least) 360 and 540 days ‘for the acquisition of basic foodstuffs’.40 As for exporting developing countries, their own export credits would also temporarily obtain special conditions for maximum repayment terms and self-financing obligations.41

40

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Draft Modalities, Annex J, para. 5: ‘Notwithstanding the terms of paragraphs 3 (a) and 4 (a) above, least-developed and net food-importing developing countries as listed in G/AG/5/Rev.8 shall be accorded differential and more favourable treatment comprising allowance for a repayment term in respect of them of between 360 and 540 days for the acquisition of basic foodstuffs. Should one of these Members face exceptional circumstances which still preclude financing normal levels of commercial imports of basic foodstuffs and/or in accessing loans granted by multilateral and/or regional financial institutions within these timeframes, a further extension of such a time frame shall be provided for. The standard monitoring and surveillance provisions of the Agreement shall apply to these cases.’ Draft Modalities, Annex J, para. 4: ‘Developing country Members providers of export financing support shall be eligible to benefit from the following elements: (a) Maximum repayment terms: the developing country Members concerned shall have a phase-in period of four years after the first day of the implementation period or the end of 2013, whichever comes first, within which to fully implement the maximum repayment term of 180 days. This shall be achieved as follows: (i) on the first day of implementation, the maximum repayment term for any new support entered into shall be 360 days; (ii) two years after implementation, the maximum repayment term for any new support to be entered into shall be 270 days; (iii) four years after implementation the maximum repayment term of 180 days shall apply. It is understood that where there are, after any of the relevant dates, preexisting support arrangements entered into under the limits established in the sub-paragraphs (i)–(iii) above, they shall run their original term. (b) Self-financing: the self-financing period referred to in paragraph 3(b) shall be fifty percent longer for developing country Members.’

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Food Aid With regard to international food aid, a new attempt was made to target the trade- and competition-relevant aspects of certain forms of such aid. This indeed is the only issue where WTO can contribute to separating the wheat from the chaff. Other food aid issues such as quantity, timeliness, targeting and quality will still have to be handled by the appropriate international and national bodies. Unfortunately, the Doha negotiators again lost focus and – with the unhelpful backing of interested nongovernmental organisations (NGOs) – became entangled in the more difficult question of what constitutes ‘genuine’ food aid. As pointed out above, this is none of WTO’s business. The solutions proposed in July 2008 will not resolve this issue. On the contrary, they opened a new loophole by designing what came to be called a ‘safe box’. It now appears that virtually all present forms of food aid will qualify as ‘safe’.42 Moreover, the door to this ominous box can be opened not only by qualified institutions such as the World Food Programme (WFP) and the International Committee of the Red Cross (ICRC). Each and every beneficiary government and minister, and even certain other NGOs, would be allowed to declare an ‘emergency appeal’.43 Another example of rather loose language concerns the thorny but WTO-relevant notions of ‘tied aid’ and ‘aid in kind’: ‘Members commit to making their best efforts to move increasingly towards more untied cash-based food aid.’44 In other words, genuine food aid remains a matter of best endeavour, because the Draft Modalities (re-)broaden the scope for food aid monetisation which is potentially distorting local markets and depressing food prices. Food security for the hungry might increase – but if such food aid also reaches consumers with the means to purchase food, the Doha Round results will come at the expense of local, unsubsidised food production. As for food aid levels, the proposed modalities are equally disappointing, even considering that WTO cannot be an aid organisation: when contemplating the negative correlation between high world market prices and volumes of food aid actually disbursed, the envisaged ‘commitment to maintain an adequate level of international food aid’45 can 42 43

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Cf. Draft Modalities, Annex L, paras. 6–10. ‘… a non-governmental humanitarian organization of recognized standing traditionally working in conjunction with the former bodies’ (Draft Modalities, Annex L, para. 6, lit.b). Draft Modalities, Annex L, para. 3. 45 Draft Modalities, Annex L, para. 1.

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hardly be called a compelling proposal to ensure the right to food for the truly needy. If WTO is serious about making a contribution to what is mainly a problem of NFIDCs, it should replace the unfortunate Marrakesh Decision by an unequivocal commitment in the Doha Round results to at least maintain food aid volumes (not values!) at a certain average level, even (or rather, especially) when world market prices decrease.

Supply management? Somewhat surprisingly – as there had been virtually no negotiation on this subject – Chairman Crawford Falconer also included some proposals for a (new?) type of international commodity agreement. In particular, he called for a review of the old Article XXXVIII of the GATT 1994.46 Besides ignoring the rather doubtful experiences gained with some such agreements in terms of efficiency and effectiveness – doubtful at least with the wisdom of hindsight – these proposals appear to be equally unhelpful from a global and long-term food security perspective.47 Not only do they smell of new export cartels; they could also lead to new attempts to drive up consumer prices, especially in NFIDCs. General assessment The new export competition disciplines contemplated under the DDA are certainly a positive development inasmuch as they are more stringent and comprehensive than the ones presently applicable. For food security purposes, however, they still lack sufficient clarity and commitments especially on food aid. Instead of opening a safe box for all and sundry, Doha should focus on displacement impacts of food aid, both for suppliers from other countries and from domestic sources. Export prohibitions and restrictions and differential export taxes Most economists would agree that export restrictions of all kinds reduce food security because they discourage local producers and increase world market prices. Against economic wisdom, this is precisely what 46

47

Cf. Draft Modalities para. 92: ‘Provision shall be made to ensure the possibility that Members may take joint action through adoption of suitable measures, including through adoption of intergovernmental commodity agreements, for stabilization of prices for exports of agricultural commodities at levels that are stable, equitable and remunerative.’ These proposals were slightly modified in the December 2008 modalities (WTO 2008b, paras. 91–102).

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happened in early 2008. In order to maintain their domestic market supplies at reasonable prices many countries applied export bans or quantitative restrictions, or slashed export tariffs on their main food commodity exports. The problem here is political in the sense that, when facing a food riot, no Minister seeking re-election will leave exports unrestricted. As Director General Jacques Diouf of the Food and Agriculture Organization of the United Nations (FAO) put it, ‘export bans are a normal reaction for any government that has a prime responsibility to its people’.48 However, according to the World Bank such policies tend to have a limited impact on domestic price levels, but significant negative revenue effects for domestic producers.49 In addition, such policies reduce food security in importing countries by reducing the quantities getting on to the world market. From the perspective of an importing country, disciplines on export restrictions are the missing pieces in the food security puzzle. As far back as 1947 negotiators were aware of the sensitivity of this particular good: Article XI of the GATT prescribes the general elimination of quantitative restrictions, but it explicitly permits Members to apply such restrictions for food security purposes.50 Under the AoA, Members applying such restrictions have to give notice of the restrictions under Article 12, and must consult with concerned importing Members. There is no restriction on export taxes. The Draft Modalities of 10 July propose only very moderate procedural improvements for the present disciplines in Article XI:2(a), by way of a modification of Article 12 of the AoA:51 (1) Notification of new restrictions; (2) A limit of twelve months to the duration of new export restrictions, or up to eighteen months if affected importing countries were to agree. However, there is no proposal for regulating the main culprits, i.e. differential export taxes, and there is no substantive discipline on the right of exporters to restrict their exports. The argument that the Doha negotiating mandate does not allow for such disciplines appears rather 48

49 50

51

Interview with Reuters, ‘Food riots to worsen without global action – UN’, dated 11 April 2008. Referenced in Anderson et al. 2008. Art. XI:2 lit.a exempts from the general prohibition of Article XI ‘export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party’. Cf. Draft Modalities, paras. 161–167.

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cynical in the face of the present food crisis. The fact that the African Group, invoking its need for ‘policy space’, refused a proposal from Switzerland and Japan to discipline export restrictions demonstrates that more analysis and consultations are needed for a meaningful result in terms of food security. Food security under export restrictions may temporarily increase for domestic consumers, but it can have a negative impact on domestic production. Moreover, food security is likely to substantially decrease for consumers dependent on food available on the world market. A failure to discipline export restrictions would thus be particularly damaging to food security if ‘Doha’ makes importers (much) more vulnerable to market disturbances resulting from export restrictions. Indeed, a lack of disciplines for export restrictions is a source of uncertainty for all operators, which in turn creates mistrust of the world trading system. If exports are not restricted, it is hard to expect other measures to function effectively. In other words, a lack of disciplines on export restrictions increases food security risks and hence raises questions about alternatives in risk assessment and management in relation to food security.

5.

Summing up: policy recommendations

Food security is best ensured through the right combination of production, trade and (where appropriate) aid policies. It is generally agreed that the main responsibility, and the instruments, for ensuring adequate food security lie at the national level. Even so, this chapter shows that the 2008 food crisis was exacerbated by the rapid changes at the international level where various trade and agricultural policy decisions fuelled the pernicious price hikes. This explains why, after decades of neglect, the supply-side constraints in poor countries could not be removed overnight, and why the policy response to the food crisis cannot be focused on food-importing developing countries alone. After decades of artificially depressed world market prices and declining ODA and research and development for agriculture, most developing country farmers now lack capital and the know-how needed to respond to higher food prices. This chapter focuses on the contributions the international policy and institutional framework can make. Obviously, many of the international parameters of the food crisis will need to be addressed outside the WTO, be it autonomously, bilaterally, or with the help of the UN system, including organisations such as the WFP and the Food Aid Convention (FAC). But trade will also have to play its role of efficiently allocating food, at least to

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the places where there is demand with some purchasing power. In this context, the WTO Membership can play a role through the Enhanced Integrated Framework and Aid for Trade programmes. However, at the centre of this enquiry are the trade rules pertinent to food security which only WTO can lay down. I have analysed separately the present rules established as a result of the Uruguay Round and those in the offing if and when the Doha Round is concluded. My conclusions present both parts together, following the order of the three pillars of the AoA. (1) Market access disciplines improve food security insofar as trade can flow more freely to where food is needed most – except of course to people without the means to feed themselves or to buy their daily food requirements in sufficient quantities. The Uruguay Round brought about little additional market access, and the Marrakesh NFIDC Decision must be considered as a piece of political expediency which has no chance of making a contribution to improving food security. This is likely to change considerably with the Doha Round. (2) The Uruguay Round domestic support results may have been a small step in the right direction, but they have changed little if anything in practice. Plainly, the new AoA rules and disciplines could not prevent the 2008 food crisis. As for Doha, substantially reducing rich country farm support will allow poor countries to compete on a more level playing field and thus increase domestic food supply. But there is much room for improvement. In particular, stringent disciplines are still lacking for staple food subsidies in rich countries. Subsidies for biofuels produced from food crops and their direct substitutes should be completely prohibited. There will be product support caps, but the envisaged caps will still allow rich countries to gain competitive advantages, even in poor countries. (3) New disciplines on export competition were a major achievement of the Uruguay Round to the benefit of agricultural trade liberalisation – but, especially in times of high food prices, they are a blunt instrument for food security improvements. Unfortunately, the results expected from the Doha negotiations will not only bring improvements (prohibition on export subsidy and disciplines for export credits). Absent further progress some of the new rules will even impair global food security. In particular, export restrictions and international food aid are two highly sensitive subjects and have so far proven immune to any serious trade disciplines: (a) The new provisions applying to export restrictions are largely procedural.

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(b) The July 2008 Draft Modalities broaden the scope for food aid monetisation that is suppressing local food production. Instead of opening a ‘safe box’ for all and sundry, Doha should focus on displacement impacts of food security, both for suppliers from other countries and from domestic sources. An overall assessment shows a clear dilemma between the benefits WTO disciplines can bring to global food security, and the reduction in ‘policy space’ these very same disciplines entail not only for rich countries (e.g. US domestic support limits) but also in terms of market access to developing countries with vulnerable production structures such as India and Indonesia. This dilemma explains the numerous ‘softeners’ by which such countries can shield their producers from too much competition (Special Products (SP), SSM, and others). As the profound divergences between different developing countries in the Doha negotiations showed, there is no single solution to this dilemma. In my view, only a comprehensive package addressing both interests – more market access and more ‘policy space’ (but with a strong dose of graduation) – can assist the progressive reform process necessary in most countries, including carefully targeted solutions for special products and safeguards. It would be bad both for the overall economy and for food security if the leeway granted by the new market access conditions were used to protect parochial interests rather than to better feed needy consumers. Le mieux est l’ennemi du bien. At the time of writing this article, the Doha Round itself may be at stake. Too high expectations, especially in the form of demands outside the DDA mandate, could very well topple the apple-cart. In the absence of global rules, the food security of some countries could become the food insecurity of many others. Nevertheless, the above-mentioned shortcomings should be addressed if ‘Doha’ is to avoid collateral damage to food security. In addition, food-importing developing countries, when looking at how fast food aid and export credits dwindle when prices are up, will be well advised to consider asking for two kinds of clear, strong and binding commitments from the ‘Doha winners’: aid for trade guarantees, and the maintenance of food aid volumes when prices are up. WTO is about trade liberalisation, and only indirectly about development. But the Doha Round is supposed to make a meaningful contribution to development. In respect of food security it could do so by operating a gradual reduction of taxpayer support to rich farmers, and a parallel increase in support to poor farmers in developing countries.

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Aid for trade may bring some results – but nobody so far has integrated the financial question into the Doha equation. At the same time the present food crisis has brought windfalls to food exporters. In times of high food and oil prices, benefit-sharing between winners and losers could help finance the investment and technology needs of poor farmers. The respite in negotiations provides an opportunity for new thinking and better solutions. Even though these are trade negotiations, if the Doha Round fails to seriously address the food security issue, can it maintain its claim to be a ‘Development Round’? References Anderson, Kym et al. 2008. ‘Measuring Distortions to Agricultural Incentives Revisited’. World Bank Policy Research Working Paper 4612. –––(ed.) 2009. Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007. London: Palgrave Macmillan and Washington, DC: World Bank. Food and Agriculture Organization of the United Nations (FAO) 1996. Rome Declaration on World Food Security and World Food Summit Plan of Action. World Food Summit 13–17 November, Rome. –––2002. The State of Food Insecurity in the World 2001. Rome: FAO. Häberli, Christian 2008. ‘Market Access in Switzerland and in the European Union for Agricultural Products from Least Developed Countries’, NCCR Trade Regulation Working Paper 2008/5 (www.nccr-trade.org/images/stories/ publications/IP5/Market%20Access%20in%20Switzerland_Haeberli.pdf). Helble, Matthias, Shepherd, Ben and Wilson, John S. 2007. Transparency and Trade Facilitation in the Asia Pacific. Department of Foreign Affairs and Trade, Australia. OECD 2008. Biofuel Support Policies: An Economic Assessment. Paris: OECD. Schiff, Maurice and Valdes, Alberto 1992. The Plundering of Agriculture in Developing Countries. Washington, DC: World Bank. World Bank 2008. Rising Food Prices: Policy Options and World Bank Response. Washington, DC: World Bank. World Food Programme (WFP) 2008. Food Aid Flows 2007. Rome: World Food Programme. World Trade Organization (WTO) 2001. International Trade Statistics 2001. –––2008a. ‘Committee on Agriculture in Special Session, Revised Draft Modalities for Agriculture’ (document TN/AG/W/4/Rev.3 dated 10 July 2008). –––2008b. ‘Committee on Agriculture in Special Session, Revised Draft Modalities for Agriculture’ (document TN/AG/W/4/Rev.4 dated 6 December 2008). –––2008c. ‘Committee on Agriculture in Special Session, Report to the Trade Negotiations Committee by the Chairman of the Special Session of the Committee on Agriculture, Ambassador Crawford Falconer’ (JOB(08)/95 dated 11 August 2008).

13 Conclusions and policy recommendations baris karapinar and christian ha¨ berli*

The year 2008 marked two of the biggest crises in recent history: the food crisis at the beginning of the year, and the financial crisis at the end. The crises have hit different segments of society. The main victims of the former were the poor, even the poorest of the poor, living in low-income countries, whereas the initial casualties of the latter were relatively affluent income groups in the developed world. Nevertheless, in the era of increasing economic globalisation, the secondary and long-term impacts of both crises affect millions of people around the world. This book deals with the food crisis, while the financial meltdown is still unfolding. At the time it was drafted, just after the World Trade Forum in September 2008, food and oil prices had started to fall, and they were still on a sharp downslide by the end of the year. Yet it remains to be seen whether the financial crisis will mutate into a real cyclone for the developing world, right down to the level of subsistence farming. The analysis of the possible implications of such a development goes beyond the scope of this book. However, if the projections presented in this book are accurate we argue that – regardless of cyclical factors – the end of the secular trend of declining food prices has come. Emerging economies, particularly in Asia, will continue to grow, with rising disposable household incomes and a shift in dietary preferences from the predominance of primary commodities (i.e grain, roots, or pulses) to secondary and processed commodities (i.e. animal products, oils and fats, sugar and sweets), while climate change and water shortages will further restrict response capacity in agriculture. Prices of oil are projected to rise in the medium term due to growing demand, which will * Baris Karapinar, Senior Research Fellow, World Trade Institute, University of Bern, Switzerland. Christian Häberli, Senior Research Fellow, World Trade Institute, University of Bern, Switzerland.

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re-stimulate the production of biofuels from agricultural feedstocks. In this context, one should expect that the real prices of food for the next decade will be above the average for the past decade (see Chapter 5 by Jones and Elasri). Hence, achieving food security will continue to be a major challenge for consumers, governments and international organisations alike. The ultimate difficulty here is the policy dilemma between quick fixes and long-term solutions. Given the multidimensionality of the problem, addressing food crises requires a comprehensive and coherent policy agenda at all levels, from the local to the international. In this context, the likely outcome of the Doha Round will be key to the trade side of food security, although the dilemma between policy space and a multilateral locking in of agricultural reform remains an issue over and beyond the Doha ‘Development’ Round. Nevertheless, given that the number of people suffering from a combination of poverty, malnutrition and hunger has not declined substantially over the past three decades (except for the success stories of countries like China, Vietnam and Malaysia), ending food crises does not seem to be a realistic objective, at least in the short term. However, a global policy agenda, presented under 20 headings here, might alleviate the current and future food crises.

1.

Different price hike impacts on poverty call for differentiated solutions

The impact of higher food prices on the poor differs between households, depending on their production and consumption profiles. As Martin and Ivanic have illustrated in Chapter 2, net buyers of food stand to lose, while net sellers of food may benefit from higher prices to the extent of their surplus production. In the long term, agricultural labourers – who are usually net food buyers – may see their wages rise, which may outweigh their short-term losses through higher food bills. On the other hand, the urban poor would lose out, which is increasingly important as the urban population continues to rise. The potential effects are also sensitive to the type of commodity involved – as the share of different commodities in the consumption basket of the poor varies. Hence, an appropriate policy response should be designed to reflect the distribution of targeted households with certain profiles of production and consumption. A differentiated approach is needed to prompt net food sellers to produce and sell more while protecting vulnerable households that are net buyers of food. On the supply side, this requires investments to remove bottlenecks in input and output markets, broadening both the supply base

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and the supply capacity. On the demand side, the poorest of the poor, who are net food buyers, need to be supported with safety nets in the short term (see policy recommendation 7 below), and with policies that enhance their opportunities in labour markets in the longer term. Depending on the impact at the commodity level, the policy response should also encourage a transition in cropping and trade patterns aimed at eliminating the shortage of crops that are relatively more significant to food security. It is clear that the differentiated approach proposed here requires a rigorous analysis of the production and consumption profiles of the poor households that are targeted. Chapter 2 has illustrated the complexity of such an analysis. Its findings reflect the composition of nine countries chosen for that particular study, which may also be relevant for other cases. However, given the enormous complexity and variation at the national, regional, household and commodity levels, an appropriate policy response should be based on an assessment of the way in which the different profiles of poor households are distributed, which would help in identifying the target groups. Beyond agricultural policies addressing supply and demand constraints, the most effective long-term solution, as Martin and Ivanic have put it in Chapter 2, is to focus on raising the incomes of the poor. This is particularly relevant in the context of the current financial crisis – as it has increased the number of food-insecure countries, according to the World Food Programme (2008), by pushing unemployment up, reducing remittances and slowing export-oriented non-agricultural sectors. Hence, policy recommendations dealing with food security should also be aimed at promoting stability and growth in the non-agricultural sector. For instance, Anderson in Chapter 7 has underlined the importance of removing market distortions, which would benefit non-agricultural growth. While the food crisis has highlighted the importance of agricultural policies promoting food security, the long-term solution to the problem involves a broad range of growth stimulation and poverty alleviation measures beyond agriculture.

2.

Invest in small farms throughout the developing world

Large proportions of the labour force in low-income countries continue to be occupied in the agricultural sector, which is reflected in the form of high levels of unemployment and underemployment and the predominance of small farms – 500 million in total, operating less than 2 hectares on average. Given that a massive shift of agricultural labour to non-farm employment, i.e. a structural transformation, is not likely to take place in

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the short or medium term, the policy response aimed at improving the agricultural production capacity of developing countries needs to address the special challenges that small farms face in an era of increasing globalisation of agriculture and the food industries. Given the limited availability of resources, there is a need for broad strategic choices. In ecologically unfavourable areas where improving agricultural productivity is prohibitively expensive and difficult, if not impossible, directing resources to promote labour transition from agriculture is a preferable solution. Providing higher education, and investing in transport and communication infrastructure in these areas would ease the process of labour transition to non-agricultural activities. In addition to strategic urbanisation, an idea shared by Adesina in Chapter 4, transition to non-agricultural activities within rural areas also needs to be promoted (Reardon 2004). In areas with favourable agro-ecologies where the potential for agricultural development is high, encouraging diversification to high-value markets is the way to raise the purchasing power of rural producers and consumers.1 On the marketing side of the sector, increasing demand, especially from developed countries, for differentiated food products offers lucrative market opportunities. Niche markets such as cut flowers, seeds, organic vegetables and fruits have been growing rapidly over recent decades – and these are all sectors with potential for well-organised small farmers. Developing countries enjoy advantages because of their lower labour costs and greater ecological variation, allowing for a broad range of product differentiation. However, being competitive in these markets requires technological improvements that reduce input costs, good transportation infrastructure, post-harvest storage and processing facilities, good coordination among producers (especially among small farms), a conducive economic climate for domestic and foreign investment, efficient market links and good marketing strategies (Diao and Hazell 2004). Given that multinational processors, retailers and supermarkets now play an increasingly important role in defining market conditions, governments should also facilitate linkages between producers and the upper segments of the value chain (Reardon et al. 2003, Shepherd 2005).2

1

2

This may require first raising agricultural productivity of staple crops. As productivity rises, less land will be devoted to food staples over time and more to higher value cash crops. This also requires dealing with ‘power asymmetry’ issues in relation to the ‘buying power’ of large retailers, demanding ever higher standards and more services from their contractors, at lower prices, which may also exclude small farms from participating in these new marketing chains (Gibbon 2003).

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Invest in ‘greener’ and ‘rainbow’ revolutions in low-income countries

There is no doubt that the level of investment in agricultural R&D needs to be scaled up, especially in regions that have not been benefiting from the Green Revolution. As Martin and Ivanic have underlined in Chapter 2, marginal rates of return on research investments are extremely high. However, because of the way it was designed and implemented in Asia, the Green Revolution might not offer the right model, except as a metaphor for intensified investment in agricultural technology, for those countries lagging behind in adopting modern technologies. It is now essential to move from a state-led centralist approach to a combination of bottom-up low technologies and private sector-driven high technologies designed to address the needs of small farms located in less favourable agro-ecological areas. However, a single package of technological inputs (e.g. chemical fertilisers, pesticides and irrigation) will not suffice, unlike in the case of the first Green Revolution. Given the enormous diversity of farms and agro-ecological conditions, as Adesina has put it in Chapter 4, what is needed is a ‘rainbow revolution’, a broad range of flexible technological solutions addressing socio-economic and ecological variations at the local level. The environmental dimension too, which was missing in the Green Revolution, should feature as an essential component of this new approach. There is thus a need for a ‘greener revolution’ – technologies and farm management practices involving a low carbon footprint (e.g. integrated manure and waste management), land and water protection (e.g. low tillage and micro-irrigation), human and animal safety (e.g. integrated pest management).

4.

Invest in new-generation technologies designed to address local variations

New technologies, rather than the old technologies of the Green Revolution, should be the driving force behind the idea of a ‘rainbow revolution’. The new emphasis on technology and innovation should go beyond covering only basic food crops. A broader approach towards improving food security should also aim at innovation in high-value cash crops including vegetables, fruits, and animal products which would strengthen the purchasing power of the poor. Similarly, technologies to improve the nutritional value of basic and processed food products should be part of the new technology package to address food insecurity and malnutrition.

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In unfavourable agri-ecological areas where poverty and malnutrition prevail, new technologies, including transgenics, offer plant varieties with higher photosynthetic efficiency and enhanced resistance to abiotic stress, such as drought, excessive cold and heat, which are major constraints on productivity growth.3 For instance, modifying rice, by using advanced biotechnological tools, to overproduce trehalose improved its tolerance to salt, drought and cold stresses (e.g. Annou et al. 2005, Garg et al. 2002). New methods, such as marker-aided selection, are also used to improve the efficiency of conventional breeding techniques, for instance in identifying traits in drought-tolerant maize to be bred with other varieties, such as African maize, which has improved the crop’s biomass efficiency (i.e. a higher proportion of seed development compared to overall vegetation) (Nuffield Council on Bioethics 2003; Bruce et al. 2002). The use of biotechnology to produce vaccines and therapeutic proteins – such as the well-known example of Golden Rice and millet with the ability to produce high levels of beta-carotene – is also promising to help the poor overcome serious nutrition and health problems.

5. Develop new institutional approaches, including public– private partnerships, to enhance research, development and extension services In many developing countries, public research institutions lack the resources and institutional infrastructure to drive the process of innovation and implementation in a flexible, market-oriented and environmentally friendly manner. In fact, today’s research and development activities are predominantly carried out by private enterprises and quite often by transnational corporations. In this context, public–private partnerships (PPPs), both at the domestic and international level, offer new institutional opportunities for enhancing technological innovation and research in the field of agriculture. There are various types of institutional design for PPPs. In general, public institutions and the private sector pool their resources for research which should then benefit both the private sector and the general public. The private sector usually provides its methodological knowledge, financial resources and marketing expertise, while the public sector 3

Similarly, research on frost-tolerant potatoes in Bolivia and salt-tolerant wheat in Egypt has shown promising results (FAO 2002). Using biotechnology to improve pest and disease resistance in East African bananas has resulted in higher productivity gains than from conventional breeding (Smale et al. 2006).

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provides institutional and infrastructural support, including supportive legislation and the use of testing facilities. In this way, whereas private companies may gain access to large domestic agricultural markets, the public sector may use its bargaining power for the benefit of poor farms. PPPs can also help public institutions to convert their research outputs into end-user-oriented products. They can also promote private sector development in countries with agricultural sectors dominated by state-owned monopolies (Spielman et al. 2007). Some recent examples show that innovation-driven PPPs can play a major role in making technology both available and accessible to smallholders in low-income developing countries.4 As such, PPPs should be a strong feature of a new institutional thinking addressing food security and rural poverty through innovation and technology (Karapinar and Temmerman 2008).

6. Develop new institutional approaches addressing food insecurity in the context of new political and economic challenges In Chapter 4, Adesina has argued that the neo-liberal policy paradigm imposed on developing countries in the 1980s and 1990s has undermined the institutional capacities providing basic services in the agricultural sector. This echoes the widely held argument that the dominant ‘Washington Consensus’ paid no particular attention to agricultural and rural development, concentrating exclusively on macroeconomic stability (e.g. de Janvry et al. 1997, Onis and Senses 2005; Karapinar et al. forthcoming). Hence, he has called for a new policy paradigm which would rebuild effective institutions providing public goods that are essential for stimulating agricultural development. Yet this is not to suggest that old public institutions should resume their previous role of providing services which were often ineffective, counterproductive and outright corrupt. For instance, as Anderson (Chapter 7), and Martin and Ivanic (Chapter 2) have pointed out, the agricultural 4

There have been important examples of PPPs in developing countries. The International Service for the Acquisition of Agri-Biotech Applications (ISAAA) is a significant example of a PPP at the international level. Through its regional operations (in Africa, Asia and Latin America), it acts as an intermediary between companies in developed countries and public institutions in developing countries (Kameri-Mbote et al. 2001). The Consultative Group on International Agricultural Research (CGIAR) has also encouraged several promising partnership projects with the private sector. For example, its collaboration with a Japanese private company produced the first Bt cassava variety developed in Africa (Rausser et al. 2000).

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sector in developing countries had been heavily taxed until the mid-1990s, which had hindered growth. Hence, in light of the policy recommendations above, new institutional approaches combining macro-level strategies with micro-level policy interventions are urgently needed to improve food security and alleviate malnutrition in low-income countries. Investing in farmers should be a strong feature of such a new institutional approach. Farming populations are suffering from a combination of ageing, low educational attainment, brain drain – as skilled young farmers migrate in search of better opportunities in urban areas – and HIV/AIDS (mainly in sub-Saharan Africa). The way institutions are designed to invest in farmers should reflect that agriculture is increasingly becoming a knowledge-intensive and market-driven sector, with new trade rules, increasingly stringent safety and quality standards and changing consumption habits and trends. Hence the education and training of farmers should not only involve basic agricultural practices, but should also include farm management and marketing, new techniques of integrated crop and pest management, product quality and safety, and environmental protection. Given the management failures of past decades and the diminishing resources for agricultural infrastructure, institutional investments should be strategic and targeted at the local level – as elaborated in policy recommendations 1, 2 and 3 above. For instance, in Chapter 4, Adesina has proposed a concentration of public investment in agro-ecological zones where achieving high returns through productivity growth is easier and more feasible. Favourable ecological areas, or as Adesina puts it ‘national crop intensification zones’, could be prioritised for targeted institutional reform. In this context, a conclusion to the Doha Round with the effect of levelling the playing field would further increase the profitability of such investments in hitherto unsubsidised farming operations without export outlets. Perhaps the biggest single development effect of trade liberalisation would be to remove the present disincentives for R&D, training and investment in agriculture in poor countries.

7.

Provide food aid as a short-term response

International food aid is without doubt a particularly sensitive negotiating matter because it is quite often the only way to save human lives. At the same time, free food can wreck local production or displace foreign but unsubsidised competitors. In some instances, food aid has been used for market creation in the expectation that normal trade will pick up

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again after a food crisis. A more effective and efficient way to provide food aid is through safety-net-type programmes that are better targeted to those most in need while having less distorting impacts on markets (see Prowse in Chapter 11, and Jones and Elasri in Chapter 5). A partial solution to the problem of negative correlation between food aid and prices pointed out by Prowse in Chapter 11 is to prohibit socalled monetisation of aid in kind, and/or to allow any such aid in cash form only. The major obstacle here is the surplus-disposal policy of the US which continues (de iure or de facto) to offer large amounts of international food aid in tied forms and in kind, despite taking a different approach in its domestic aid programme – as Orden has pointed out in Chapter 9. On the other hand, a mandatory elimination of all tied aid could lead to a dramatic reduction in total food aid. Hence, it is not very realistic to expect a perfect outcome from the Doha Round, for any form of food aid and any kind of food crisis. But the new disciplines envisaged in December 2008 actually weaken the role WTO can play in ensuring food security without reducing food aid. The disciplines created a ‘safe box’ which could actually turn into a Pandora’s Box because it can accommodate not only genuine food aid but also various market displacement strategies. The difficulty of defining ‘genuine’ (or ‘nongenuine’) food aid scientifically or in a negotiated text has become all too apparent during the Doha negotiations. Generally speaking, in trade litigation cases, the burden of proof of market displacement and the like will remain with the complainant. Nevertheless, while the WTO as a trade organisation can ensure fair competition in relation to food security, it can neither regulate on quality of food aid, nor can it decide on quantities and procedures. The challenge is to achieve inter-institutional coherence.

8.

Carefully negotiate the new forms of foreign direct investment in agriculture

The 2008 food crisis has also brought some controversial plans of foreign direct investment (FDI) in the form of large-scale crop production in poor countries, which is also a sign of countries losing trust in the multilateral trading system (von Braun 2008). This type of FDI may follow a new pattern whereby capital-endowed countries with high imports of food or feed, such as South Korea, China or Saudi Arabia, are preparing to invest in large production projects in low-income countries endowed with low-cost labour force and natural resources,

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such as Madagascar, Mozambique and Ethiopia. The objective is to improve food security in the investor country. These investment projects might come in various forms but there is a risk that these new investments might not be integrated into local structures. The new investors might follow an export processing zone track rather than acting through the more traditional joint ventures involving technology transfer and, more generally, production and processing spin-offs into the local economy. Perhaps the most prominent example, in terms of size, is a largescale project (reportedly worth US$ 6bn) by Daewoo Logistics of South Korea intended to produce half of Korea’s maize import needs in Madagascar, possibly with agricultural labour imported from abroad.5 While the details, and the first results, of many such projects remain to be seen, it appears that FDI is emerging as a new tool to promote food security with a predominant investor interest. It will be interesting to see whether such projects will operate profitably over a longer term, and whether they will have a positive economic, social and environmental impact on the host country. Such investment initiatives, if taken only for the benefit of the investor, may exacerbate food insecurity in the host country taking away crucial production capacity for domestic consumption. On the other hand, African agriculture urgently needs large amounts of investment, as Adesina has underlined in Chapter 4. Given the scarcity of domestic capital, and the declining level of Official Development Assistance (ODA) in agriculture, such FDI projects may offer a feasible alternative. If FDI comes with a basket of new technology, business connections, infrastructure and human capital, and if such investments lead to local spin-offs, they could bring enormous benefits to the host country. Governments, therefore, should envisage new FDI policies in order to deal with a new generation of FDI. By providing a regulatory and institutional framework, the objective is to create an environment conducive to FDI as well as to promote human development, the rule of law, good corporate governance and the protection of labour rights and the environment. The new FDI deals, if negotiated and implemented wisely, could set a good example for more to come. This requires a systematic investigation of the potential impacts of this FDI on economic, social and environmental sustainability. 5

Reported by the Financial Times, ‘Daewoo to Cultivate Madagascar Land for Free’, 19 November 2008; updated information in Financial Times dated 18 March 2009, ‘Madagascar Scraps Daewoo Farm Deal’.

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From a perspective of WTO regulation, such new FDI will have to be examined not only under the agricultural trade and support disciplines and the General Agreement on Tariffs and Trade (GATT) Article III relating to national treatment, but also under the Agreement on TradeRelated Investment Measures (TRIMs).

9.

Reconsider biofuels support policies

It is clear from the analyses presented in various chapters of this book, mainly Chapter 5 and Chapter 6, that the rapidly growing demand for biofuel feedstock has been one of the largest sources of demand growth over recent years and hence a strong factor pushing agricultural prices up. In Chapter 5, analysing the Organisation for Economic Co-operation and Development–Food and Agriculture Organization of the United Nations (OECD–FAO) outlook, Jones and Elasri have argued that from 2005–2007, biofuels accounted for more than half of the increase in the demand for grains and vegetable oils. Similarly in Chapter 6, Schmidhuber and Matuschke have shown that due to a steep increase in demand for biofuels, the demand patterns for food and feed saw a radical departure from their regular trends. This was the case for maize and rapeseed in particular, crops used for the production of ethanol and biodiesel, respectively. Having such a significant impact on agricultural commodity prices justifiably brings biofuels policies in developed countries under scrutiny. Biofuels subsidies, estimated to have reached around US$ 11 billion annually, encourage production and a shift in cropping patterns from food crops to biofuels. However, although the OECD–FAO outlook projects that energy prices and biofuels feedstock would become relatively permanent factors exerting upward pressure on commodity prices, biofuels prices fell substantially after summer 2008. This led to the bankruptcy of several US ethanol factories, which might weaken the investment incentives in the biofuels sector, lessening its upward impact on commodity prices. However, it should be noted that mandates for renewable content in transportation fuels (e.g. 10 per cent in the EU by 2020) can require ethanol use even at low oil or gas prices. In Chapter 5, Jones and Elasri have presented an analysis suggesting that the energy security, environmental, and economic objectives of biofuel support policies are unlikely to be met through the ‘first generation’ biofuel technologies. However, given the political economy of agricultural support policies in the US, as Orden has illustrated in Chapter 9, the amount of

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support and subsidies for biofuels is not likely to decrease in the near future, although the way they are provided may change given the less favourable market circumstances following the 2008 financial crisis. The optimal policy change would be the reallocation of current support – which distorts international trade and commodity prices – into R&D in ‘second generation’ technologies which do not rely upon feed and food stocks. This would encourage a reduced use of fossil energy and decrease greenhouse gas emissions. Such a policy change would offer potentially greater benefits with much reduced impacts on food prices.

10.

Take into account environmental challenges, prioritise climate change adaptation

This book has also underlined the importance of addressing new environmental challenges in the context of food security. In Chapter 6, Schmidhuber and Matuschke looked at the effects of weather variability and climate change on the food crisis, finding that weather patterns had indeed had an impact on output of some crops. In particular, the droughts that occurred in Australia and Ukraine in 2006–2007 created local shortages of wheat which were strong enough to put pressure on the global markets. However, this was attributed to a cyclical climate impact. The authors noted that the argument that climate change is already affecting overall agricultural production in a negative way has not yet been substantiated. However, models of climate change scenarios indicate that projected variations in temperature and precipitation will significantly alter the areas suitable for crop production as well as affecting existing cropping patterns and yields. More importantly, the frequency and magnitude of extreme events, such as heat waves, droughts and floods are expected to intensify, raising the risk of production failures which will create additional market volatilities. Chapter 6 has underlined once again the alarming fact that the hardest hit by these shifts will be those countries and people, mainly located in low latitude areas (e.g. sub-Saharan Africa), who are already suffering food insecurity and malnutrition. Therefore, there is a need for effective adaptation strategies, involving technological innovation and institutional development, which would help to improve food security under climate change. As mentioned above, more investment in a new generation of agricultural technologies and more sustainable farming systems are essential. Farm management methods promoting enhanced efficiency in the use of water and land resources, and crops that are able to cope with weather extremes need to

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be developed, specifically to address the needs of small farms in lowincome countries. Similarly, new institutions capable of assessing and managing climate-related risks are also needed. Given their limited institutional capacities, low-income countries should pool their resources to deal with these risks and develop common adaptation strategies at the regional level. Such strategies should be based on an impact scenario running at high resolution over different sub-regions, accounting for different land-use and water-cycle effects. Through institutional and technical assistance, the international community should foster such capacity in regional collaboration.

11. Deepen international markets in agricultural commodities As was highlighted in Chapter 7 (by Anderson) and in Chapter 2 (by Martin and Ivanic), global agricultural markets are ‘thin’ because only a small share of global farm production is traded internationally. This increases price instability. Hence one of the best insurance policies against market volatility is to deepen the markets through trade reform and improved market access as well as by improving supply capacity in developing countries (Prowse, Chapter 11). In light of policy recommendations 1–6 above, the domestic supply response in developing countries needs to be enhanced by increasing production potential and transport infrastructure. Flows of information on markets and prices need to be improved too. Above all, stronger multilateral disciplines on trade policies and domestic support would contribute to the deepening of international trade in agricultural commodities. As Jones and Elasri have put it in Chapter 5, for trade liberalisation to bring opportunities and welfare benefits, the existence of properly functional markets is a primary requirement.

12.

Reform the WTO rules in agriculture relevant to food security

Two WTO disciplines which are most relevant in the context of a food crisis, namely those relating to food aid (when prices are low) and to export restrictions (when prices are high), have been identified by Häberli in Chapter 12 as being particularly weak. Unfortunately, for political reasons, neither are likely candidates for reform in the Doha Round. Nevertheless, both need to be improved if WTO is to make a meaningful contribution to food security.

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But these are not the only limits to disciplining agricultural trade and improving food security through a reinforcement of the contribution from the trade side. Clearly, the envisaged tariff and subsidy reduction figures of the Doha negotiations are very ambitious: a 70 per cent reduction in the highest bands would surpass the results of any previous multilateral negotiations, for any sensitive sector. But the actual impact on the trade and investment climate will be dented by the so-called sensitive products, special products, and by the special safeguard mechanism. These new instruments may in diplomatic terms be called ‘policy space’ tools, meaning WTO Members will have to reduce less than what would be agreed in principle. In reality, these ‘pain softeners’ would simply reduce the global welfare benefits from new market openings: the higher the flexibility for governments to foreclose markets, the lower will be traders’ and investors’ confidence in the new market access guarantees. If ‘Doha’ is to lead to deeper trade and hence more global food security, a comparative assessment is required on this compromise between the presently envisaged steep liberalisation steps and the extensive possibilities for compensation.

13.

Provide more market access to stimulate production in competitive developing countries

The food crisis of 2008 brought about many reductions in applied import tariffs. But they had almost no impact on actual trade. As in a case of ‘prisoner’s dilemma’, most markets opened at the same time. Rich countries’ tariff reductions caused similar moves by poor countries to fail. As a result, they were often unable to import sufficient quantities of food and just earned less tariff revenue. A good way to stimulate global agricultural markets without increasing market volatility would be through a reduction of bound tariff levels. When it comes to autonomous market access initiatives, there are other problems as well. For instance, duty-free quota-free treatment for all products of least-developed countries (by the EC and some others) brought no substantial additional market access because of sanitary and phytosanitary measures and the ‘zero-risk’ attitude taken in importing markets (Häberli in Chapter 12). But what about food security as a result of developing country ‘policy space’? Are net food-importing developing countries able and willing to use variable tariffs for managing imports and stimulating production in a way which will reduce hunger, or will their decisions frustrate both traders and domestic producers and thus actually reduce competitive

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food supply to the detriment of the very same people such policies are supposed to help? To say the least, it is clear that more protection for producers does not equate to more food security. In other words, variable tariffs are probably not the best instruments for guiding structural developments towards greater food efficiency. And they can be outright damaging to food security, when policy space is misused for protection of big farmers. The same would seem to apply, at least in the long term, to efforts to protect economically unsustainable farmers, because high tariffs would then come at the cost of consumers, rich and poor. Anyhow, small farmers consuming most of their output themselves would not gain much from higher prices. Moreover, the parameters shaping effective market access are increasingly determined by private actors. There are global players operating all along the food chain, from R&D and input supplies right down to the retail level. In many instances the private actors adopt and enforce their own production and processing methods and marketing norms, over and above national and international sanitary and technical standards. On the one hand, these standards may disconnect staple food producers in developing countries from their markets, possibly depriving them of new technologies and other possibilities for increasing productivity. On the other hand, their cash crops need to meet ever higher private (and governmental) standards. Such situations call for new institutional solutions such as PPPs associating all stakeholders, to ensure that small farmers can also benefit from innovations and from market development initiatives co-sponsored by importing countries.

14. Reduce developed country domestic support The recipes for reforms of domestic support policy are well known (Jones and Elasri in Chapter 5). But as the food crisis of 2008 has shown, the two biggest players – the EU as described by O’Connor in Chapter 8 and the US as discussed by Orden in Chapter 9 – as well as many other rich country producers used their still considerable ‘policy space’ (or rather the absence of multilateral trade disciplines) in a way that actually exacerbated the crisis for the poor. For instance, export subsidies and food aid went down when world market prices went up. In terms of its domestic support policies, the Common Agricultural Policy has undergone significant reform, and more is in the pipeline. More decoupling (although decoupling of payments from production cannot be perfect), the end of export subsidies (2014) and the end of milk

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quotas (2015), and more regional aid instead of agricultural price support are all very welcome developments from a food security perspective as shown by O’Connor in Chapter 8. On the other side of the Atlantic, the 2008 US Farm Bill introduced a new, alternative means of domestic support by way of a new farm revenue programme called the Average Crop Revenue Option (ACRE) Program which could violate US commitments, even if prices remain above levels that would trigger traditional counter-cyclical or pricesupport payments (Orden in Chapter 9). In addition, the Farm Bill continues to provide counter-cyclical payments and biofuels subsidies. These measures distort prices, and hence, would have an adverse effect on global food security. Only a conclusion of the Doha Round can lock in and encourage new reforms, and irreversibly reduce bound tariffs. The draft modalities of July 2008 are quite ambitious in this respect. However, a serious push for more food security requires more negotiation, for example, on a tightening of certain green box provisions and effective disciplines in product support, combining to create a level playing field and to promote efficient allocation of resources globally. It is clear, however, that regardless of such improvements and as long as ‘real’ green box expenditures are allowed without any quantitative limitation whatsoever, poor producers will never be on a par with their competitors in developed countries who are paid for their production of so-called public goods.

15.

Eliminate export competition instruments

The oldest and most contentious concern of the Cairns Group countries, export subsidy-free trade in agriculture, would appear to be achievable by the end of 2013, even if the Doha Round is not concluded in good time. At least in the opinion of the EC Commission, this instrument seems to have outlived its usefulness.6 The impact on food security, however, appears ambivalent: while higher prices could stimulate non-subsidised production in poor countries, urban consumers will have to pay more to secure the necessities of life, at least while such subsidies are being phased out. At any rate, in order to fully develop its beneficial impact, ‘Doha’ will need to fully discipline export credit subsidies and export state trading and, as mentioned above, ‘non-genuine’ food aid. 6

On the other hand, at the beginning of 2009 the EU reintroduced export subsidies for dairy products.

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16. Progressively prohibit export restrictions in line with bound tariff reductions A common response to the recent high prices of agricultural commodities and food has been for exporting developing countries to apply quantitative export restrictions, taxes and prohibitions, and price controls (Jones and Elasri, Chapter 5). Incidentally, both the US and the EC have applied some such restrictions over the past 50 years, and both have shown a less than lukewarm response to proposals for stringent multilateral disciplines. Export restrictions are perhaps a politically natural but economically nonsensical reaction to a food riot at home. With a potentially significant negative effect on global food security, they will not face substantially stricter disciplines after conclusion of the Doha Round. Exporting countries simply refuse to trade what they consider as their sovereign rights against the bound tariff reductions they can expect on their main export markets. Yet, it is quite obvious that increased market access entails new supply risks for food-importing countries. Export restrictions should be gradually prohibited, or as Herrmann and Peters have suggested in Chapter 10, should be subjected to strict criteria, similar to import restrictions, and the right to make such exceptions should be limited to poor developing countries.

17. Replace anti-agricultural biases with aid for trade For a number of reasons outlined in various chapters of this book, agriculture appears as the neglected sector of the economy in many developing countries. For decades agricultural exports were taxed, or otherwise limited if not outright prohibited, and new investments often went into manufacturing or infrastructure unrelated to the support of agricultural input or output. Even much of multilateral and bilateral ODA was focused for years on other economic sectors or basic needs. As Prowse has discussed extensively in Chapter 11, promotion of trade and investment in the agricultural sector has been weak. For instance, after two decades of decline in its own funding for agriculture, the World Bank, in its World Development Report 2008: Agriculture for Development (World Bank, 2007) underlined the need for R&D, training, extension and investment in the primary commodity sector and the local food industry. Today, the ‘benign neglect’ has fortunately disappeared, and the need to increase, in particular, aid for trade (AFT) programmes has been recognised by negotiators and academics alike. Agriculture, like other sectors, is now being treated under all four avenues of the WTO

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Aid for Trade programme adopted at the Hong Kong Ministerial Conference in November 2005: global monitoring (with OECD figures), national and sub-regional reviews, regional AFT networks, and the global review foreseen in summer 2009 to provide guidance on implementation and evaluation. In WTO the main responsibility for this task lies with the Committee on Trade and Development, which reports to the Trade Negotiation Committee of the Doha Round. As Prowse has reiterated in Chapter 11, it is crucial for developing countries to benefit from the opportunities offered by a trade round. Hence the volume of AFT should increase to help them build up supply capacities, and adjust to preference erosion and potential fiscal costs. However, owing to the financial meltdown of 2008, overall development assistance, including AFT, risks being among the casualties.

18.

New international commodity agreements?

Somewhat surprisingly, the negotiation proposals of July 2008 included the idea of renewed international commodity agreements. Besides ignoring the more than doubtful past experiences (doubtful at least with the wisdom of hindsight) with some of these agreements in terms of efficiency and effectiveness – as Herrmann and Peter have underlined in Chapter 10 – these proposals appear to be equally unhelpful from a global and long-term food security perspective. Not only do they introduce the possibility for trade-restricting agreements between producer countries, they could also lead to new attempts to drive up consumer prices, including in net foodimporting developing countries. At the same time, export cartels will not give producers the appropriate incentives to increase economically viable production and to diversify income sources.7 Policy advisors and trade negotiators would be well advised not to chase red herrings!

19. Conclude the Doha Round – wisely The big question is how the results expected from the Doha Development Agenda will affect global food security. Most authors agree that WTO and ‘Doha’ can make an important contribution to poverty reduction by disciplining farm support and reducing tariffs in rich countries. However, in light of policy recommendations 11–14, the situation is less clear when it comes to the more specific issue of food security. 7

These proposals were slightly modified in the December 2008 modalities (WTO 2008).

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This may simply be because, although there have been reduction numbers on the negotiating table since before July 2008, allowing for production, price and revenue impact forecasts, the disciplines directly affecting food security are less clear – or simply absent. However, as Anderson has argued in Chapter 7, if the WTO’s Doha Development Agenda collapses, market distortions in developing countries would continue to grow, whereas the governments of high-income countries would find it more difficult to resist the agricultural protection lobbies, which may exacerbate the lack of trust in the international trading system. In the context of the current financial meltdown, the Doha Round should be completed successfully, preferably including specific policy reforms to address the food crisis.

20.

Invest in global public goods

Making globalisation of agriculture and food work for the poor also requires investment in global public goods. As in all other sectors of the economy, product development, investment, sourcing, processing and marketing are undergoing rapid changes, but agriculture in low-income countries has lagged behind in this respect, not only because the factor mobility of land resources is limited, but also because of the failures to reform both production and trade policies. A multilateral trading system which is fair and functions well, and which would benefit farmers in developing countries, would be an important public good in this context. International agricultural research centres, such as the CGIAR, were leading hubs of innovation during the time of the Green Revolution. However, since then they have been ineffective in developing and disseminating new technologies to raise agricultural productivity and contribute to sustainable management of natural resources in agriculture. Hence their operational and institutional set-up needs to be reformed – as Adesina suggested in Chapter 4 – to provide more flexible and farmeroriented services. It is essential that they operate in a new and more accountable financial architecture with a clear mandate and quantifiable performance benchmarks. The world lacks a global institutional and legal system to address food crises as Díaz-Bonilla has argued in Chapter 3. But although we clearly see a multitude of partly overlapping agricultural organisations at the national and international levels, we do not advocate a new institution. Rather, the objective must be to improve inter-agency cooperation and coherence, which is blatantly missing today. This may be because international and

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national bodies are all too often driven by their own agendas and timetables. Another reason may lie in the difficulty of obtaining food security through a suitable combination of production and trade.8 Only interdisciplinary research and regulation can point the way towards more coherence and away from self-defeating solutions due to institutional malfunctioning. All international institutions, such as the International Bank for Reconstruction and Development (IBRD), the International Monetary Fund (IMF), the United Nations Conference on Trade and Development (UNCTAD), FAO, the International Fund for Agricultural Development (IFAD), the Consultative Group on International Agricultural Research (CGIAR), World Food Programme (WFP), Food Aid Convention (FAC) and WTO, must review their mandates and roles in the light of the new food security parameters and the impact which their own regulatory reforms might have on the performance of the other institutions.

The way forward For decades, malnutrition and hunger have been a fact of life for millions of the poor, while the rest of the world has been producing surpluses, a situation which led some development thinkers, like Amartya Sen, to question the common perception of the underlying causes of food insecurity. He powerfully illustrated – by introducing the missing social context defining it as a multidimensional problem of economic underdevelopment, political exclusion, social inequality and lack of legal protection – that food security was not a simple problem of a mismatch between the production and the consumption curve. This defining background is still relevant at the local level. Yet, the global political economic context has been constantly evolving – as societies have become more interdependent. Now the challenge is to alleviate food insecurity in an era of increasing economic globalisation driven by international trade, and of increasing ecological fragility and climate change, a process which threatens to leave the poor further behind. Cyclical problems leading to food crises cannot always be avoided. However, we argue that by re-setting policy priorities, the decades-long neglect of rural and agricultural development in low-income countries can be reversed. Agricultural research and extension services can be revitalised. 8

For instance, at the WTO Ministerial Conference in Hong Kong, in November 2005, WFP warned WTO Ministers against disciplining food aid – a clear example of entrenched and conflicting institutional interests.

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With the help of more investment (including foreign direct investment) and new technologies, there can be a new impetus that would kick-start a rapid agricultural growth in favourable agro-ecological zones. With the right institutional support, small farms can be integrated into global food supply systems. And with collaboration and common action, growing environmental challenges, such as climate change, water shortages and land degradation can all be addressed in a sustainable way. Considering the colossal amount of know-how available, the huge progress in research and technology achieved in recent decades, and the enormous financial resources which could be made available if there is political will (evident in the amount of agricultural support – more than US$ 250 billion – budgeted annually in developed countries, or in the case of bailing out failing financial institutions in the US and Europe in 2008), it is simply unacceptable that millions of people still cannot even satisfy the most basic of all human needs: food security. As for the role of international trade and WTO, regulatory matters with an impact on food security are a case in point to which there is no simple solution. The current stalemate in the Doha Round trade negotiations provides space for a new look at what is on the table. Tariff and subsidy reductions in rich countries will contribute towards levelling the playing field even for producers in poor countries, while reducing the ‘policy space’ for rich governments, except for the (almost un-reformed) green box. Possible outcomes will depend not only on the results of the Doha Round but, perhaps even more, on the world market prices during the implementation phase. Nevertheless, those who benefit most from the Doha Round should pick up the bill for the collateral damage caused by the lack of full disciplines, and by the short-term negative impact of the first multilateral trade round of the twenty-first century. In all probability, ‘Doha’ will not close the remaining loopholes in disciplining ‘non-genuine’ food aid and export credits as well as export restrictions, partly because some such loopholes are justified by a need for ‘special and differential treatment’. This fact and the likely short-term, yet temporarily negative, impact on poverty call for remedial measures in the form of binding aid commitments (Häberli, in Chapter 12). Compensation commitments – even though their implementation is not within WTO’s field of competence (except in its role in the Aid for Trade monitoring programme)9 – must be part and parcel of the Doha 9

Rather oddly, the only place the WTO ‘Aid for Trade’ programme is mentioned in the December 2008 Modalities on agriculture, is in paragraph 102 dealing with (new) international commodity agreements.

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final act. Clearly, best endeavour declarations will not suffice to improve, or even maintain, the present levels of global food security. As the nonuse of the Marrakesh Declaration during the food crisis of 2008 has shown, such texts are evidently insufficient. WTO is a trade and not a food security organisation. Nevertheless, and this is the moral bottom line for ‘Doha’, the benefits of a ‘Development Round’, at the very least, must not come at the expense of the poorest of the poor. References Annou, M. M., Fuller, F. H. and Wailes, E. J. 2005. ‘Innovation Dissemination and the Market Impacts of Drought-tolerant, Genetically Modified Rice’, International Journal of Biotechnology 7: 113–27. Bruce, W. B., Edmeades, G. O. and Barker, T. C. 2002. ‘Molecular and Physiological Approaches to Maize Improvement for Drought Tolerance’, Journal of Experimental Botany 53: 13–25. ‘Daewoo to Cultivate Madagascar Land for Free’, Financial Times, 19 November 2008. de Janvry, A., Key, N. and Sadoulet, E. 1997. ‘Agricultural and Rural Development Policy in Latin America: New Directions and New Challenges,’ Working Paper No. 815, University of California at Berkeley: Department of Agricultural and Resource Economics Division of Agriculture and Natural Resources. Diao, Xinshen, and Hazell, Peter 2004. ‘Exploring Market Opportunities for African Smallholders’, International Food Policy Research Institute, Vision 2020 Conference Brief, prepared for the conference on ‘Assuring Food and Nutrition Security in Africa by 2020: Prioritizing Actions, Strengthening Actors, and Facilitating Partnerships,’ held in Kampala, Uganda, 1–3 April 2004. Food and Agriculture Organization (FAO) 2002. Electronic Forum on Biotechnology in Food and Agriculture, ‘What Should be the Role and Focus of Biotechnology in the Agricultural Research Agendas of Developing Countries?’, in Background Document to the Conference 8, 13 November– 11 December 2002, available at: www.fao.org/biotech/C8doc.htm (accessed 14 January 2008). Garg, A. K. 2002. ‘Trehalose Accumulation in Rice Plants Confers High Tolerance Levels to Different Abiotic Stresses’, Proceedings of the National Academy of Sciences of the United States of America 99: 15898–903. Gibbon, Peter 2003. ‘Value-chain Governance, Public Regulation and Entry Barriers in the Global Fresh Fruit and Vegetable Chain into the EU’, Development Policy Review 21: 615–25. Kameri-Mbote, P., Wafula, D. and Clark, N. 2001. ‘Public/Private Partnerships for Biotechnology in Africa: The Future Agenda’. African Centre of Technology

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Studies International Environmental Law Research Centre, available at: www.ielrc.org (accessed April 2007). Karapinar, B. and Temmerman, M. 2008. ‘Benefiting from Biotechnology: Pro-poor IPRs and Public Private Partnerships’, Biotechnology Law Report, 27(3). Karapinar, B., Adaman, F. and Ozertan, G. (eds.). Rethinking Structural Reform in Turkish Agriculture: The World Bank’s Strategy and Beyond. New York: Nova Science Publishers (forthcoming). Lipton, Michael 2005. ‘The Family Farm in a Globalizing World: The Role of Crop Science in Alleviating Poverty’, Washington, DC: International Food Policy Research Institute, 2020 Discussion Paper, Publication No. 40. ‘Madagascar Scraps Daewoo Farm Deal’, Financial Times, 18 March 2009. Nuffield Council on Bioethics 2003. ‘The Use of Genetically Modified Crops in Developing Countries: A Follow-up Discussion Paper’, available at: www. nuffieldbioethics.org/fileLibrary/pdf/GM_Crops_Discussion_Pape r_2004. pdf (accessed October 2007). Onis, Z. and Senses, F. 2005. ‘Rethinking the Emerging post-Washington Consensus’, Development and Change 36: 263–90. Rausser, G., Simon, L. and Ameden, H. 2000. ‘Public–private Alliances in Biotechnology: Can They Narrow the Knowledge Gaps between Rich and Poor?’, Food Policy 25: 499–513. Reardon, Tom 2004. ‘Rural Non-farm Income in Developing Countries’, Background Paper prepared for the FAO for the Non-farm Workshop at the World Bank in 1999, available at http://siteresources.worldbank.org/ DEC/Resources/ruralNonfarmIncomeinDevelopingCountries.pdf (accessed January 2009). Reardon, T., Timmer, C. P., Barrett, C. B. and Berdegue, J. 2003. ‘The Rise of Supermarkets in Africa, Asia, and Latin America’, American Journal of Agricultural Economics 85: 1140–46. Shepherd, Andrew W. 2005. ‘The Implications of Supermarket Development for Horticultural Farmers and Traditional Marketing Systems in Asia’, Revised version of paper first presented to the FAO/AFMA/FAMA Regional Workshop on the Growth of Supermarkets as Retailers of Fresh Produce, Kuala Lumpur, 4–7 October 2004. Smale, M., Edmeades, S. and Degroote, H. 2006. ‘Promising Crop Biotechnologies for Smallholder Farmers in East Africa: Bananas and Maize’, in Genetic Resource Policies Brief 19. Washington, DC: International Food Policy Research Institute. Spielman, D. J., Hartwich, F. and Von Grebmer, K. 2007. ‘Sharing Science, Building Bridges, and Enhancing Impact: Public–Private Partnerships in the CGIAR’, Washington, DC: International Food Policy Research Institute, Discussion Paper 00708.

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Von Braun, Joachim 2008. ‘Food and Financial Crises: Implications for Agriculture and the Poor’, Brief prepared for CGIAR Annual General Meeting Maputo, Mozambique, 1 December 2008. World Bank 2007. World Development Report 2008: Agriculture for Development. Washington, DC: World Bank. Available at http://siteresources.worldbank. org/INTWDR2008/Resources/2795087-1192111580172/WDROver2008-ENG. pdf (accessed October 2007). World Food Programme 2008. Available at www.wfp.org (accessed December 2008). World Health Organization (WHO) 2007. Diarrhoea. Available at: www.who.int/ water_sanitation_health/diseases/diarrhoea/en/ (accessed January 2007). World Trade Organization (WTO) 2008. Committee on Agriculture in Special Session, Revised Draft Modalities for Agriculture. Document TN/AG/W/4/ Rev.4, dated 6 December 2008, paras. 95–102.

INDEX

access to food, and food security 154–56 accounting principles, market-tomarket requirements 70 Adesina, Akinwumi 7, 10, 326, 327, 329, 330, 332, 341 administered prices 39 adverse weather conditions causing food price increases 110–11, 140–41 see also climate change Africa agricultural policies in 96 privatisation of extension services 96 agricultural research in CGIAR centres 99, 329 investments in 91, 105 agricultural trade in 93 food imports 245, 247 agriculture in 82–83, 84–85 ageing farmers 98–99 biofuel production 94 and climate change 103–04 credit facilities 95–96, 100–02 development assistance to 99–100, 102 foreign direct investment in 94 input market development 94–96 investment needs of 332 landownership 97–98 and poorly developed infrastructure 89 productivity of 86, 92, 104–05 and structural adjustment policies 87–88 value-added processing of food crops 92–94

democracy in 81 food crises in 81, 83–84 food prices in 89, 116–17 food security in 83, 158 Green Revolution in 91–92, 105–06 cassava production 86–87 financing of 102–03 maize production 86 political will for 89–90 rice production 87 terms of trade of 249 ageing, of farmers in Africa 98–99 AGRA (Alliance for a Green Revolution in Africa) 92, 101 Agreement on Import Licensing Procedures 303 Agreement on Subsidies and Countervailing Measures (SCM) 302–03 agreements on commodities 67, 254, 255, 317 renewal of 340 on regional trade 303–04 agricultural markets see agricultural trade agricultural policies of Africa 96 privatisation of extension services 96 of developing countries 36–39, 44 protection/trade restrictions 34, 36, 37–38, 40–41, 44, 127–29, 181–82, 183 reforms 181 and WTO legal regime 182–84 in recent food crisis 41–43, 134 reforms 181

347

348

i ndex

agricultural policies (cont.) of EU see Common Agricultural Policy of industrialised countries 129–32 reform of 18, 168 see also domestic support for agriculture Agricultural Policies in OECD Countries: At a Glance (OECD) 129–32 agricultural prices see commodities, prices of; food prices agricultural production and climate change 103–04, 150–51, 151–52 costs of 58–60 in developing countries 180, 252–53 increases of 121–21, 146–47 of small-scale farming 7–9 agricultural research in Africa, CGIAR centres 99, 329 institutions, reform of 341 investments in in Africa 91, 105 in developing countries 10, 37, 147, 184, 326–29 rates of return 85–86, 147, 184 trade reforms as incentive to 330 agricultural trade of Africa 93 food imports 245, 247 of developing countries exports 196–97, 216–17, 303 restrictions 266, 267 to EU 196–97, 216–17 imports food 125, 245–48 restrictions 265, 267 protection policies 36, 37–38, 40–41, 183 of EU 192–93 exports 192, 197–99 refunds 211–12 restrictions 211 subsidies 200–02, 208, 216, 338 imports 111–12, 192, 194–96 from developing countries 196–97, 216–17

licensing system 209 quotas 210–11 tariffs/duties 199–200, 201, 209–10, 212, 267 of industrialised countries 147–48 market distortions of 13, 40, 168–69 and EU Common Agricultural Policy 187–88 export restrictions 279, 317–18, 319 elimination of 339 export subsidies and credits 276, 338 and financial markets 292–93 by food aid 268, 276–77, 293 import tariffs/duties 336–37 trade preferences 288 welfare costs of 171 World Bank research project on 170–78 private actors in 326, 337 reform/liberalisation of 169, 178, 261, 335 in developing countries 181, 258–59, 269–70, 288–89 complementary domestic policy requirements 289–90 negotiations 312 and supply constraints 290–92 and development strategies 283–84 impact of 178–81, 264, 283, 288–89, 293 in industrialised countries 181 and R&D investments 330 and trade preferences 289 WTO promotion of 43, 303–04, 305–06, 320–21 and compensation possibilities 335–36 Doha Round 184, 262, 310–12, 314–16, 318–19 Uruguay Round 303–07 state regulation of 188 in EU see Common Agricultural Policy

index agriculture in Africa 82–83, 84–85 ageing farmers 98–99 biofuel production 94 and climate change 103–04 credit facilities 95–96, 100–02 development assistance to 99–100, 102 input market development 94–96 investment needs of 332 landownership 97–98 and poorly developed infrastructure 89 productivity of 86, 92, 104–05 and structural adjustment policies 87–88 in developing countries 169–70 and climate change 152 development assistance to 90, 147, 269, 284, 339 domestic support for 172–76, 260, 268–69 and economic growth 82 incomes of farmers 180 investments in 147, 259–60, 284, 291–92, 339 foreign direct investment (FDI) 6, 331–33 low productivity of 7, 252–53, 291 improvement strategies 325–26 R&D spending in 10, 184 need for increases 327 new technologies 326–28 PPPS 328–29 transportation costs 291 and economic growth 82 in EU 188–92 see also Common Agricultural Policy (CAP) in industrialised countries domestic support for 14, 17, 67, 131–32, 147–48, 172–73, 176, 260, 337 reforms 299–300, 337–38 in United States domestic support for 17, 65–66, 220–21, 338

349

biofuel production promotion 221, 229, 235–36, 238 and commodities prices 221, 227, 229, 235–36, 239 crop and revenue guarantees 229–31 disaster relief 231 and environmental programmes 223, 227, 237, 238 and farm lobby 231–32, 236–37 history 221–23 income support for farmers 223, 229–31, 237 legislation Farm Bill 1980 65 Farm Bill 1985 65–66 Farm Security and Rural Investment (FSRI) Act 2002 222–23 Federal Agricultural Improvement and Reform (FAIR) Act 1996 222 Food, Conservation and Energy (FCE) Act 2008 221, 224–28, 239; Average Crop Revenue Election (ACRE) programme 229–30 wheat prices 112 WTO regime on domestic support for 259–60, 320 Doha round 262, 312–14 Uruguay Round 304–05, 320 agrodealer model, in Africa 95–96 aid for trade initiatives (AFTs) 17–18, 135, 274, 283 and WTO 285–87, 339–40, 343 Algeria, terms of trade of 257 Americas, food imports by 248 Anderson, Kym 13, 14, 15, 31, 171 on agricultural trade policies 40, 41, 179, 299, 325 on Doha Round, possible collapse of 341 on domestic support for agriculture 260 on taxation of agriculture 329–30 Angola, terms of trade of 257

350

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Argentina, poverty reduction in 289 Asia food crises in, government responses to 103 food imports by 248 Green Revolution in 84, 85, 102 terms of trade of 249 ATPSM (Agricultural Trade Policy Model) 262, 264–65 Australia protection policies of 176 trade reforms by 181 wheat production in 140, 334 Azerbaijan, terms of trade of 257 balance-of-payments difficulties, of NFIDCs 300–01 Bangladesh, agricultural protection policies of 183 banking systems development banks 258 parallel 68–69 see also credit facilities Barnier, Michel 212 beef and veal, consumption of 191 beverages, prices of 53–54, 73 biofuel production in Africa 94 in EU 143 and food prices 12, 94, 143–44, 333 in Africa 12, 94, 113–15 forecasts 120, 132–33 promotion of 299, 333–34 in United States 221, 229, 235–36, 238 WTO disciplines on 314 biotechnology, uses of 328 Blandford, David 230, 234 Bolivia, terms of trade of 257 Borlaug, Norman 88 Botswana, terms of trade of 257 bound rates, of WTO 259–60 Brazil agricultural exports to EU 194–96 WTO dispute with US cotton support programme 233 BSE crisis, and meat production in EU 191

CAADP (Comprehensive Africa Agricultural Development Program) 91 Cai, Jing 34–35 Cairns Group 263 cassava production, in Africa 86–87 Central America, food imports by 248 cereals demand for 118 in China and India 145 prices, EU responses to 215 production 113, 114, 140 and biofuels 132–33 in EU 189–90 and export restrictions 266 forecasts 116, 118 stocks of 116, 138–40 CFF (Compensatory Financing Facility, IMF) 280 CGIAR (Consultative Group on International Agricultural Research) 99, 329 Chayanov, Aleksandr 8 Chile, terms of trade of 257 China agricultural protection policies of 183 dietary changes in, and food prices 145–46 climate change and agricultural production 103–04, 150–52 and food security 2–3, 10–11, 137–38, 148, 161, 334 access to food/undernourishment 154–56, 157 adaptation strategies/stabilisation measures 158–59, 334–35 food availability 150–52, 159–60 food stability 152–53 quantification of 156–60 utilisation of food 153–54 IPCC scenarios 148–50 climate stabilisation measures, and food security 158–59, 334–35 CO2 emissions, and agricultural production 151 CO2 fertilisation, and food security 158 coarse grains see cereals

index commodities agreements 67, 254, 255, 317 renewal of 340 exports, restrictions of 299 market speculation in 144 prices of 54–60, 66, 67, 68, 69–70, 76, 77 cyclical patterns 62 declines 115, 243–44 in economic recessions 72–73, 74, 77–78 and EU Common Agricultural Policy 206, 216 and food prices 121–22 forecasts 244, 275 increases 242–43 impact on developing countries 244, 245, 266–67 coping strategies 244–45, 256, 258 and terms of trade 248–49 instability of 254–55 insurances against 255–56 and US domestic support policies for agriculture 221, 227, 229, 235–36, 239 see also food prices production of 276 growth in, and GDP growth 82, 93 stocks of 112–13 and food prices 138–40 Common Agricultural Policy (CAP, EU) 38–39, 202–03 criticism of 216–17 and food crises/food security 16–17, 212–15, 217 and market distortions 187–88 mechanisms 204 objectives 203 reforms of 204–09, 212–13, 215–16, 337–38 consumers, expenditures on food 132 consumption, of beef and veal 191 corn, prices of 54, 60–62 costs of agricultural production 58–60 of transportation of agricultural products 291

351

welfare, of market distortions 171, 176–78 cotton, US support programme, and WTO rules 233, 236 countries, classifications of 13 credit facilities in Africa 95–96, 100–02 in developing countries 258 see also banking systems crop yields and CO2 fertilisation 158 and weather conditions 140–41 Croser, J. 171, 176–77 currencies, exchange rates of, regimes 171 cyclical patterns in commodity prices 62 in food prices 110–12 Daewoo Logistics 332 definitions, of food security 2, 136–37, 298 demand for agricultural products 113–15 cereals 118, 145 forecasts 118–19 influences on food prices 143–44, 145–46 oilseeds 145–46 rice 118 vegetable oils 118–20, 145–46 democracy, in Africa 81 developed countries see industrialised countries developing countries agricultural policies of 36–39, 44 protection/trade restrictions 34, 36, 37–38, 40–41, 44, 127–29, 181–82, 183 reforms 181 and WTO legal regime 182–84 in recent food crises 41–43, 134 agricultural trade of exports 196–97, 216–17, 303 restrictions 266, 267 to EU 196–97, 216–17 imports food 245–48 restrictions 265, 267

352

index

developing countries (cont.) reform/liberalisation of 181, 258–59, 269–70, 288–89 complementary domestic policy requirements 289–90 negotiations 312 and supply constraints 290–92 welfare gains 179 agriculture in 169–70 and climate change 152 development assistance to 90, 147, 269, 284, 339 domestic support for 172–76, 260, 268–69 abolishment of 67 and economic growth 82 incomes of farmers 180 investments in 147, 259–60, 284, 291–92, 339 foreign direct investment (FDI) 6, 331–33 low productivity of 7, 252–53, 291 improvement strategies 325–26 production of 180, 252–53 R&D spending in 10, 147, 184 need for increases 327 new technologies 326–28 PPPs 328–29 transportation costs 291 credit facilities in 258 economic growth in 256 expansionary monetary policies of 69 and financial crises 67–68, 73–74 food insecurity in and food self-sufficiency 37, 267 support programmes for elimination of 279–81, 282 see also food aid and trade liberalisation 124–27, 134 food prices in and commodities prices 121–22 increases 122–24, 242 and food/commodities price increases 122–24, 137, 242, 244, 245, 252–53, 266–67 coping strategies 244–45, 256, 258 and labour markets 35 and terms of trade 248–49

import-substitution policies of 169 poverty in 26–30 PPPs in 329 public investment capabilities of 256–57 see also LDCs; NFIDCs development assistance need for rebalancing of 253–54, 284 tied, elimination of 331 to agriculture 90, 147, 269, 284, 339 in Africa 99–100, 102 development banks 258 development strategies, and trade reform 283–84 Díaz-Bonilla, Eugenio 4, 13, 341 diets, shifts in, and food prices 145–46 Dimaranan, B. 14 direct payments to farmers in EU 204, 206–07, 208 OECD on 221 in United States 223, 228, 237 disaster relief programmes, in United States 231 diseases, and food security 153–54 distribution effects, of food price increases 251 diversification of income strategies 256, 258 Djurfeld, G. 88 Doha Round (WTO) 14, 184, 321–22 and aid for trade initiatives 285–87, 339–40, 343 Declaration 2001 285 Draft Modalities 2008 315–18 on aid for trade 343 on domestic support for agriculture 312–14, 320, 338 on export restrictions 318–19 on export subsidies and credits 314–16, 320–21 on food aid 316–17 and food security 308–10, 312–14, 317 on import tariffs 310–12 and food security 340–41, 343–44 negotiations 15–16, 39, 262–63, 276 and agricultural trade reform 184, 261–62, 324

index breakdown/stalemate of 18–19, 215–16 and G-33 263 and trade preferences 288 proposed commitments 336 US compliance with 234–35, 238–39 dollar exchange rates (US) appreciation of, and food prices 120–21 depreciation of 112 domestic support for agriculture in developing countries 172–76, 260, 268–69 abolishment of 67 in EU see Common Agricultural Policy and food prices 261 in industrialised countries 14, 17, 67, 131–32, 147–48, 172–73, 176, 260, 337 reform of 129–32, 299–300, 337–38 in United States 17, 65–66, 220–21, 338 biofuel production promotion 221, 229, 235–36, 238 and commodities prices 221, 227, 229, 235–36, 239 crop and revenue guarantees 229–31 disaster relief 231 and environmental programmes 223, 227, 237, 238 and farm lobby 231–32, 236–37 history 221–23 income support for farmers 223, 229–31, 237 legislation Farm Bill 1980 65 Farm Bill 1985 65–66 Farm Security and Rural Investment (FSRI) Act 2002 222–23 Federal Agricultural Improvement and Reform (FAIR) Act 1996 222

353

Food, Conservation and Energy (FCE) Act 2008 221, 224–28, 239 Average Crop Revenue Election (ACRE) programme 229–30 WTO regime on 259–60, 320 Doha Round 262, 312–14 Uruguay Round 304–05, 320 droughts 334 economic developments global 62–65, 67–68, 69, 75 macroeconomic indicators 63 in United States 69 economic growth and agriculture 82 in developing countries 256 global 66–67 GDP per capita 72 Economic Partnership Agreements (EU) 304–05 economic policies, monetarist 65 economic recessions 71–72 commodity prices in 72–73, 74, 77–78 Elasri, Armelle 6, 11–12, 275, 333 on trade liberalisation 335 empirical analyses of food price increases and poverty 26–30, 44 commodity coverage 32 country coverage 31–32 long-term impacts 35–36 methodologies 32–35 energy requirements 76 and food prices 76–77, 78 entitlement approaches, to food security 37 environmental programmes, in United States, and agricultural policies 223, 227, 237, 238 Equatorial Guinea, terms of trade of 257 equilibrium approaches/models general 34–35, 265 partial 33–34, 262, 264–65 ESF (Exogenous Shock Facility, IMF) 280

354

index

ethanol see biofuels European Union (EU) agricultural trade of 192–93 exports 192, 197–99 refunds 211–12 restrictions 211 subsidies 200–02, 208, 216, 338 imports 111–12, 192, 194–96 from developing countries 196–97, 216–17 licensing system 209 quotas 210–11 tariffs/duties 199–200, 201, 209–10, 212, 267 agriculture in 188–92 assistance to member countries by 285 biofuel sector in 143 Common Agricultural Policy (CAP) 38–39, 202–03 criticism of 216–17 and food crises/food security 16–17, 212–15, 217 and market distortions 187–88 mechanisms 204 objectives 203 reforms of 204–09, 212–13, 215–16, 337–38 Economic Partnership Agreements of 304–05 and food crises, responses to 212–15 food distribution programme 214–15 trade reforms by 181 exchange rates, of currencies, regimes of 171 expansionary monetary policies of developing countries 69 of United States 68, 70 exports agricultural of developing countries 196–97, 216–17, 303 to EU 196–97, 216–17 of EU 192, 197–99 refunds 211–12 subsidies 200–02, 208, 216, 338 restrictions of 142 bans 123–26 by commodity exporters 299

by developing countries 266, 267 elimination of 339 by EU 211 and food security 317–18, 319 impact of 16, 42, 127–29, 142, 265–66, 267, 279 WTO regime on 318–19 size of 179–80 subsidies and credits 276, 299 elimination of 338 and food prices 261 global trade regime on 308 WTO regime on 305–06, 314–16, 320–21 extension services, privatisation of, in Africa 96 Falconer, Crawford 317 famines see food crises FAO (Food and Agriculture Organization, UN) on food prices 123 on food security 136–37 conferences 49, 50 farm lobby, in United States 231–32, 236–37 farmers in Africa ageing of 98–99 credit facilities available to 95–96, 100–02 in developing countries education and training of 330 incomes of 180 in EU direct payments to 204, 206–07, 208 income support policies 206–07, 208 in United States direct payments to 223, 228, 237 power of lobby of 231–32, 236–37 female-headed households, impact of food crises on 6 fertilisers prices of 58–60 in Africa 89 use of, in Africa 88

index financial crises of 2008–2009 70–71, 73, 323 causes of 68–69 and developing countries 67–68, 73–74 end of 75 and food security 2 in developing countries 67–68 financial markets, and distortions in agricultural trade 292–93 fiscal policies, in developing countries, and trade liberalisation 289–90 Fischer-Boel, Mariann 212 food aid 17, 330–31 cash based 282 decline of 299 market distortions caused by 268, 276–77, 293 and WTO 306–07 ‘Marrakesh Decision’ on 277–78 United States programmes for 17, 232–33, 237, 282, 331 by World Food Programme 281 WTO regime on 316–17 food crises 1–2 causes of 6–7, 11–12, 137, 160–61, 300 and EU Common Agricultural Policy 16–17, 217 impact of 4–5, 323 in Africa 81, 83–84 in developing countries 137 and humanitarian aid 134 and trade restrictions 127–29 on female-headed households 6 in industrialised countries 4 in NFIDCs 300–02, 336–37 on poverty 5–6, 124, 301 responses to 276, 292, 293 in Asia 103 of developing countries 41–43, 134 of EU 212–15 export restrictions 279 by international community 292, 341–42 long-term 325 medium-term 274

355

policy recommendations 324–25, 342–43 short-term 273–74 food crops in Africa productivity of production 92 value-added processing 92–94 food distribution programmes 38, 276 of EU 214–15 food imports, of developing countries 125, 245–48 food policies, Sen on 1 food prices 30, 57, 73, 168 in Africa 89, 116–17 and biofuel production 12, 94, 143–44, 333 in Africa 12, 94, 113–15 forecasts 120, 132–33 and climate change, forecasts 154–55 decreases of 66, 115, 116–17, 167 end of 323 forecasts 121 in developing countries, and commodities prices 121–22 and domestic support for agriculture 261 and energy requirements 76–77, 78 and export subsidies 261 and import tariffs 262, 336–37 and income levels 154 increases of 1, 4, 77, 109–10, 167 causes 64, 70, 275 cyclical 110–12 structural 112–15 and Doha Round (WTO) 14 and food security 133–34, 265–66, 298 impact in developing countries 122–24, 137, 242, 252–53, 266–67 NFIDCs 300–02 policy recommendations 324–25 and poverty 25–26, 251, 301 empirical analyses of 26–30, 44 commodity coverage 32 country coverage 31–32 long-term impacts 35–36 methodologies 32–35

356

index

food prices (cont.) size of 50–62 see also food crises long-term influences on 134–35, 138 demand-side factors 145–46 supply-side factors 146–48 projections/forecasts 275, 323–24 medium-term 115–21, 134 short-term influences on 138 demand-side factors 143–44 supply-side factors 138–42 stabilisation schemes 38 and stocks 138–40 and trade liberalisation 125, 180 transmission of 116–17 see also commodities, prices of food security 342 in Africa 83, 158 and climate change 2–3, 10–11, 137–38, 148, 161, 334 access to food/undernourishment 154–56, 157 adaptation strategies/stabilisation measures 158–59, 334–35 food availability 150–52, 159–60 food stability 152–53 IPCC scenarios (SRES) 149, 150–52, 154–60 quantification of 156–60 utilisation of food 153–54 definitions of 2, 136–37, 298 ensuring of 319 in developing countries 279–81, 282 by foreign direct investments 331–33 global support systems for 279–80, 293 by IMF 280 and multilateral trading system 279, 297–98, 341 new institutional approaches to 329–30 entitlement approaches to 37 and food stocks 281–82 G-8 on 312–13 and GATT 302, 318 and global financial crisis (2008–2009) 2

and globalisation 3 and high food prices 133–34, 265–66, 298 in developing countries 122–24, 249–51, 266–67 impact of ‘Marrakesh Decision’ on 307–08 and national food self-sufficiency 37, 267 political economy of 2 right to 273 and trade 12–13, 14, 124, 319–20 liberalisation 124–27, 134, 135 multilateral trading system 279, 297–98, 341 policies 141–42, 317–18, 319 and WTO 3, 267–68, 278–79, 297–98, 302–03, 320–22, 331 Doha Round 321–22, 340–41, 343–44 Draft Modalities (2008) 308–10, 312–14, 317 Uruguay Round, Agreement on Agriculture 302, 303–07, 318 food self-sufficiency, national, and food security 37, 267 food stocks, and food security 281–82 food-borne diseases, and food security 153–54 foreign direct investment (FDI), in agriculture of developing countries 6, 94, 331–33 Friedman, J. 33–34, 36 fruit and vegetables production, US domestic support for 228 futures markets, in commodities 144 G-8, on food security 312–13 G-20 263 G-33 262–63 and Doha Round negotiations 263 Gardner, Bruce 221 GATT (General Agreement on Tariffs and Trade) 169 and food security 302, 318 Gaud, William 102 Gayi, S. 265

index GDP growth per capita 72 and agricultural growth 82, 93 and food prices 120 general equilibrium approaches 34–35, 265 geopolitics, and Green Revolution 90 global public goods, investments in 341–42 Global Trade Analysis Project Model (GTAP) 265 Global Trade and Financial Architecture Programme 286 global trading system see multilateral trading system’ globalisation, and food security 3 Gorter, Harry de 236 Green Revolution 147 in Africa 91–92, 105–06 cassava production 86–87 financing of 102–03 maize production 86 political will for 89–90 rice production 87 in Asia 84, 85, 102 and geopolitics 90 impact of 9–10 reformulations of 10, 327 GSP (Generalised Scheme of Tariff Preferences, EU) 199 Häberli, Christian 16, 17, 335 Herrmann, Michael 14, 252, 339 Hertel, T. 32, 34 High Level Task Force on the Global Food Crisis (UN) 123–24 Hong Kong WTO Ministerial Conference 286, 342 household surveys, studies using information from 34 Huang, J. 183 humanitarian aid, and food crises 134 hunger, increased number of people in danger of 156 ILASA modelling framework 160 IMF, food security assistance provided by 280 import-substitution policies 169

357

imports in Africa, food 247 agricultural tariffs/duties 123, 142, 260 in developing countries 182, 267 in EU 199–200, 201, 209–10, 212, 267 and food prices 262, 336–37 impact of 265 reduction of 299 specific product exemptions (SPs) 261, 263–65 and WTO 303–04, 320 bound rates 259–60 Doha Round 310–12 Uruguay Round 303, 320 in Asia, food 248 in developing countries food 125, 245–48 restrictions 265, 267 in EU agricultural 111–12, 192, 194–96 from developing countries 196–97, 216–17 licensing system 209 quotas 210–11 in Latin America, food 248 incomes of farmers in developing countries 180 support policies in EU 206–07, 208 in US 223, 229–31, 237 and food prices 154 national, diversification strategies for 256, 258 India agricultural protection policies of 183 dietary changes in, and food prices 145–46 investments in agricultural research in 147 poverty in 34–35 industrialised countries agricultural policies of 129–32

358

index

import-substitution policies (cont.) domestic support for agriculture in 14, 17, 67, 131–32, 147–48, 172–73, 176, 260, 337 reforms 129–32, 299–300, 337–38 EU agricultural exports to 197–99 impact of food crises in 4 trade policies of 169 reforms 129–31, 181 infectious diseases, and food security 153 infrastructure, investments in, in Africa 89 ‘instant economics’ 1 institutional arrangements, global 78 insurances, against instability of commodity prices 255–56 inter-agency cooperation 341–42 interest rates 72 international commodities agreements 67, 254, 255, 317 renewal of 340 international community responses to food crises 292, 341–42 institutional setup 341–42 International Covenant on Economic, Social and Cultural Rights, on right to food 273 international trade see trade investments in agricultural research and development (R&D) in Africa 91, 105 in developing countries 10, 37, 147, 184, 326–29 rates of return 85–86, 147, 184 trade reform as incentive to 330 in agriculture in Africa 332 in developing countries 147, 259–60, 284, 291–92, 339 foreign direct investments 6, 94, 331–33 in global public goods 341–42 public capabilities of, in developing countries 256–57

IPCC (Intergovernmental Panel on Climate Change) Special Report on Emissions Scenarios (SRES) 148–50 and food security 150–52, 154–60 Iran, terms of trade of 257 ISAAA (International Service for the Acquisition of AgriBiotech Applications) 329 Ivanic, Maros 5, 14, 251, 283, 324, 325, 329–30 Jones, Wayne 6, 11–12, 275, 333, 335 Josling, Tim 230 Just, David R. 236 Kazakhstan, terms of trade of 257 Kennan, J. 264 Krueger, A.O. 36, 176 Kuwait, terms of trade of 257 Kyoto Agreement, successor treaty to 78 labour markets and food price increases 27, 28–29 in developing countries 35 land for agricultural production, suitability of 151–52 land-idling, in United States 223 landownership, in Africa 97–98 Latin America, food imports by 248 LDCs (least-developed countries) 277–78 agricultural exports to EU 197 Levinsohn, J. 33–34, 36 liberalisation of trade agricultural 261, 335 in developing countries 258–59, 269–70, 288–89 complementary domestic policy requirements 289–90 negotiations 312 and supply constraints 290–92 and development strategies 283–84 impact of 264, 283, 288–89, 293 on food prices 125, 180

index and needs of developing countries 269–70 and R&D investments 330 and trade preferences 289 WTO promotion of 43, 303–04, 305–06, 320–21 bound rates 259–60 and compensation possibilities 335–36 Doha Round 184, 262, 310–12, 314–16, 318–19 specific product exemptions 261, 263–65 Uruguay Round 303–07 in developing countries 258–59 and food prices 125, 180 and food security 124–27, 135 multilateral 180–81 opposition to 15, 16 and trade preferences 288, 289 and welfare gains 15, 126, 179 Lindert, P. 41 Linkage model 179 Lloyd, P. 171, 176–77 loan guarantees, in African agricultural credit schemes 101–02 macroeconomic indicators and food price increases 112 global 63 Madagascar, South Korean direct investments in 332 maize production in Africa 86 Malawi 96–97 and biofuels 132–33, 143 forecasts 116 Malawi, maize production in 96–97 market access see imports, agricultural, tariffs/duties market distortions in agricultural trade 13, 40, 168–69 and EU Common Agricultural Policy 187–88 export restrictions 279, 317–18, 319 elimination of 339 export subsidies and credits 276, 338 and financial markets 292–93

359

by food aid 268, 276–77, 293 import tariffs/duties 336–37 trade preferences 288 welfare costs of 171, 176–78 World Bank research project on 170–78 market-to-market requirements 70 Marrakesh NFIDC Decision (WTO, 1994) 277–78, 307–08, 320 and food security of NFIDCs 307–08 non-use of 344 Marshall Plan 285 Martin, Will 5, 14, 32, 251, 283, 324, 325, 329–30 Matuschke, Ira 11, 12, 334 McCalla, A.F. 125 meat production, in EU 190–91 metal prices 57, 62, 73 methodologies, of empirical analyses of food prices and poverty 32–35 Meyn, M. 264 micro-finance institutions 258 mineral exports 257 modelling frameworks ILASA system 160 see also equilibrium approaches/ models monetarist policies 65 monetary policies expansionary of developing countries 69 of United States 68, 70 Morley, S. 33 Morocco, wheat production in 140 multilateral trading system 16 and export restrictions 266 and export subsidies 308 and food security 279, 297–98, 341 reform of 18–19 and trade liberalisation 180–81 national food self-sufficiency, and food security 37, 267 neo-populism, on small-scale farming 8 NERICA (New Rice for Africa) 87 New Zealand protection policies of 176 trade reforms by 181

360

i ndex

NFIDCs (net food importing developing countries) 13, 277–78 impact of food crises on 300–02, 336–37 and Marrakesh Decision 307–08 Nigeria, terms of trade of 257 O’Connor, Bernard 16, 337–38 OECD on biofuel support policies and food prices 132–33 countries see industrialised countries on direct payments to farmers 221 OECD–FAO Agricultural Outlook 113–15 on commodity prices and food prices 122 medium-term projections of agricultural prices 115–21, 134 oil exporters, terms of trade of 257 oil prices 54, 57, 62, 64–65, 66 decreases of 115 and food prices 120 and food security 159 increases of 113–14 impact of 141 and OPEC 66 oil producers 69 oilseeds demand for 145–46 prices 118 OPEC (Organization of the Petroleum Exporting Countries), and oil prices 66 Orden, David 15, 17, 234, 331, 333–34 Pakistan, agricultural protection policies of 183 palm oil production 118 parallel banking systems 68–69 partial equilibrium approaches/models 33–34, 262, 264–65 Peru, terms of trade of 257 Peters, Ralf H. 14, 261, 262, 339 Piñeiro, V. 33

Polaski, S. 34–35, 265 policy transformations, speed of 168 political economy, of food security 2 population growth, and food security 156–58 poverty alleviation of, and trade liberalisation 15 in developing countries 26–27 and food prices 25–26, 251, 301 empirical analyses of 26–30, 44 commodity coverage 32 country coverage 31–32 long-term impacts 35–36 methodologies 32–35 impact of food crises on 5–6, 124, 301 reduction strategies 325 Poverty Reduction Strategy Papers (PRSPs), reviews of 284 PPPs (public-private partnerships) 328–29 Prebish, R. 169 price insulating policies 38–39, 45 price transmission 116–17 private actors, in agricultural trade 326, 337 privatisation, of extension services 96 productivity of agriculture in Africa 86, 92, 104–05 in developing countries 7, 252–53, 291 improvement strategies 325–26 proportional change approaches 33 protection policies 169 in agricultural trade 178 of developing countries 34, 36, 37–38, 40–41, 44, 181–82, 183 reforms 181 and WTO legal regime 182–84 of EU 208 of industrialised countries 147–48 of Australia and New Zealand 176 Prowse, Susan 331, 339, 340 public goods, global, investments in 341–42

index ‘rainbow revolution’ 327–26 rapeseed oil, and biofuel production 143 rates of return on investments in agricultural research 85–86, 184 in India 147 Ravallion, M. 36 recessions 71–72 commodity prices in 72–73, 74, 77–78 reforms of agricultural policies 18, 168 of agricultural research institutions 341 of agricultural trade 169, 178, 261 in developing countries 181, 258–59, 269–70 complementary domestic policy requirements 289–90 negotiations 312 and supply constraints 290–92 and development strategies 283–84 and Doha Round 184, 261–62 impact of 178–81, 283, 288–89, 293 in industrialised countries 129–31, 181 need for 335 and trade preferences 289 see also liberalisation of domestic support for agriculture in industrialised countries 299–300, 337–38 EU Common Agricultural Policy (CAP) 204–09, 212–13, 215–16, 337–38 United States 222 regional trade agreements, NorthSouth 303–04 Reimer, J. 34 research and development (R&D) investments in agriculture in Africa 91, 105 in developing countries 10, 37, 147, 184, 326–29 rates of return of 85–86, 147, 184 trade reform as incentive to 330 ‘rethinking rural development’ school, on small-scale farming 8–9

361

Revenga, A. 42–43 rice demand for 118 prices of 31, 54, 60 production in Africa 87 forecasts 116, 118 trade policies on 41 rights, to food 273 Rockefeller Foundation, training of agrodealers in Africa by 95 rural development policies of EU 208–09 rethinking of 8–9 Russia, terms of trade of 257 safety-net/safeguard measures 38, 42–43, 45 effectiveness of 128–29 of WTO 212, 311 Saudi Arabia, terms of trade of 257 Schiff, Maurice 176, 297–98 Schmidhuber, Josef 11, 12, 334 self-sufficiency goals, in food security 37, 267 Sen, Amartya 1, 37, 342 Singer, H.W. 169 Single CMO Regulation (EU) 209 small-scale farming 7–9 social protection policies, in developing countries 289–90 socioeconomic development, and food security forecasts 156–58 soil depletion, in Africa 82–83 South Korea, investments in Madagascar by 332 soybean EU imports of 194 prices of 54, 60 special safeguard mechanisms (SSMs), in WTO agreements 212, 311 specific product exemptions (SPs) 261, 263–65 speculation, in commodities markets 144

362

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SRES (Special Report on Emissions Scenarios, IPCC) 148–50 and food security 150–52, 154–60 stabilisation schemes/measures for food prices 38 and climate change 158–59, 334–35 state regulation, of agricultural markets 188 Stern Review on the Economics of Climate Change 103 Stevens, C. 264 stocks of commodities 112–13 cereals 116, 138–40 and food prices 138–40 of food, and food security 281–82 structural adjustment policies and agricultural trade 258–59 and agriculture in Africa 87–88 sugar imports by EU 210 prices, and biofuels 133 production in EU 192 in United States, domestic support for 231 supplies of agricultural products in EU control of 207 short-term 138–42 influences on food prices 138–42, 146–48 and liberalisation of agricultural trade in developing countries 290–92 see also stocks support mechanisms for food security cash 282 global 279–80, 293 technologies bio 328 new, in agriculture in developing countries 326–28 temperature rises, and agricultural production 150–51

terms of trade of Asia 249 of developing countries 257 and commodities price increases 248–49 Timmer, C.P. 36, 38 trade agreements, regional North–South 303–04 and food security 12–13, 14, 124, 319–20 restrictive policies 141–42 international, theories of 285 liberalisation of in developing countries 258–59 welfare gains 126, 179 and food prices 125, 180 and food security 124–27, 134, 135 multilateral 180–81 opposition to 15, 16 and trade preferences 288, 289 and welfare gains 15, 126, 179 see also reforms, of agricultural trade measures impact of 167–68 as price insulating policies 38–39 see also exports; imports policies of developing countries, and food crises 127–29 and food security 141–42, 317–18, 319 of industrialised countries 129–31, 169, 181 rethinking of 18 on rice 41 see also protection policies terms of of Africa 249 of Asia 249 of developing countries 257 and commodities price increases 248–49 see also agricultural trade; aid for trade initiatives trading systems see multilateral trading system

index transportation costs, for agricultural products in developing countries 291 TRI (Trade Reduction Index) 171, 177–78 Ukraine, wheat production in 140, 334 undernourishment and climate change 156, 157 and socioeconomic development 156–58 United Nations High Level Task Force on the Global Food Crisis 123–24 United States agriculture in domestic support for 17, 65–66, 220–21, 338 and commodities prices 221, 227, 229, 235–36, 239 crop and revenue guarantees 229–31 disaster relief 231 and environmental programmes 223, 227, 237, 238 and farm lobby 231–32, 236–37 history 221–23 wheat prices 112 biofuel policies in 221, 229, 235–36, 238 compliance with WTO rules 228, 233, 237–38 Doha Round proposed commitments 234–35, 238–39 Uruguay Round outcomes 222–23, 233–34 development assistance by, for agriculture 90, 102 dollar exchange rates appreciation of, and food prices 120–21 depreciation of 112 domestic support for agriculture in income support for farmers 223, 229–31, 237 legislation Farm Bill 1980 65 Farm Bill 1985 65–66

363 Farm Security and Rural Investment (FSRI) Act 2002 222–23 Federal Agricultural Improvement and Reform (FAIR) Act 1996 222 Food, Conservation and Energy (FCE) Act 2008 221, 224–28, 239 Average Crop Revenue Election (ACRE) programme 229–30 economic developments in 69 food aid programmes of 17, 232–33, 237, 282, 331 monetary policies of 68, 70 Uruguay Round (WTO) 16 Agreement on Agriculture 178 on domestic support for agriculture 304–05, 320 on export subsidies and credits 320–21 and food security 302, 303–07, 318 on import tariffs 303, 320 outcomes 39 US commitments to and compliance with 222–23, 233–34

Valdés, Alberto 125, 176–77, 297–98 Valenzuela, E. 179 value-added processing, of food crops 92–94 Van der Mensbrugghe, D. 179 Vanzetti, D. 262 vegetable oils demand for 118–20, 145–46 production 113, 118 and biofuels 132–33 Venezuela, terms of trade of 257 Vietnam 31 water-borne diseases, and food security 154 weather conditions and food price increases 110–11, 140–41 see also climate change

364

i ndex

welfare costs, of market distortions 171, 176–78 gains of trade liberalisation 15, 179 in developing countries 126, 179 wheat prices of 54, 60, 112 production 111, 113, 114 and biofuels 132–33 declines of 140, 334 forecasts 118 World Bank assistance to agriculture 284, 339 to food security 280–81 funding of CGIAR by 99 on hunger and malnutrition 275 on poverty 124 research project on agricultural market distortions 170–78 studies on agricultural trade policies 299 World Development Report 1986 (World Bank) 36 World Development Report 2008 (World Bank) 40, 127–29, 339 World Food Conference (FAO, 1974) 49 World Food Programme 281 World Food Security Conference (FAO, 2008) 50 World Trade Organization (WTO) Doha Round 14, 184, 321–22 and aid for trade initiatives 285–87, 339–40, 343 Declaration 2001 285 Draft Modalities 2008 315–18 on aid for trade 343 on domestic support for agriculture 312–14, 320, 338 on export restrictions 318–19 on export subsidies and credits 314–16, 320–21 on food aid 316–17 and food security 308–10, 312–14, 317 on import tariffs 310–12

and food security 321–22, 340–41, 343–44 negotiations 15–16, 39, 262–63, 276 and agricultural trade reform 184, 261–62, 324 breakdown/stalemate of 18–19, 215–16 and G-33 263 and trade preferences 288 proposed commitments 336 US compliance with 234–35, 238–39 and food security 3, 267–68, 278–79, 297–98, 302–03, 320–22, 331, 343–44 Hong Kong Ministerial Conference 2005 286, 342 law and policy 16 on agricultural support measures 259–60 on domestic support for agriculture 259–60, 320 direct payments to farmers 228 US compliance with 228, 233, 237–38 and liberalisation of agricultural trade 43, 303–04, 305–06, 320 bound rates 259–60 compensation possibilities 335–36 impact for developing countries 182–84, 269–70 specific product exemptions 261, 263–65 Marrakesh NFIDC Decision (1994) 277–78, 307–08, 320 and food security of NFIDCs 307–08 non-use of 344 Uruguay Round 16 Agreement on Agriculture 178 on domestic support for agriculture 304–05, 320 on export subsidies and credits 320–21 and food security 302, 303–07, 318

index on import tariffs 303, 320 special safeguard mechanisms 212 outcomes 39 US commitments to and compliance with 222–23, 233–34

WRI (Welfare Reduction Index) 171, 177 yields see crop yields Zambia, terms of trade of 257 Zedillo, Ernesto 285–86

365