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IMGXYZ525IMGZYXSandra Polaski welcomed participants to the Carnegie Endowment and noted that the seminar was designed to broaden the range of discussion of agricultural trade by including experts, negotiators and direct stakeholders, such as farmer organizations from developing countries. Mr. Rouille D’Orfeuil noted that the recent breakdown of the Doha Round of WTO negotiations has created an opportunity for negotiators and stakeholders to step back and reassess the priorities and direction of the talks. Mr. Rouille D’Orfeuil reminded everyone that trade liberalization inevitably creates winners and losers; without appropriate policies to assuage negative shocks to the losers, a Doha agreement could actually worsen rural poverty and inequality. Mr. Rouille D’Orfeuil also applauded Ms. Polaski’s contributions to the trade debate, particularly her innovative approach to modeling unemployment and underemployment in rural labor markets in developing countries.
Session I: Assessing the impact of agricultural trade liberalization
The goal of the program’s first panel was to review the findings of Carnegie’s recent study with regard to the agricultural sector and compare it with other leading models. The panel was chaired by Antoine Bouet and panelists included Ms. Polaski, Mr. Jean-Marc Boussard and Mr. Dominique Van der Mensbrugghe. Mr. Bouet began the session by pointing out that models have been converging in finding increasingly smaller, but still positive gains from trade liberalization.
Ms. Polaski concurred that the gains from a Doha deal are likely to be small. These small stakes can help explain the lack of urgency shown by negotiators: reaching an agreement that would yield only modest economic gains could still impose adjustment costs in losing sectors. The Carnegie model’s predictions of modest gains are consistent with results from the leading World Bank and CEPII models. Most gains that accrue to developing countries can be traced to manufacturing liberalization, which is consistent with findings from other models when comparable scenarios are simulated.
This finding challenges the conventional wisdom that agricultural liberalization would allow poor countries to reduce poverty and promote growth through agricultural exports. Ms. Polaski enumerated three reasons why agricultural liberalization could actually harm many developing countries. First, many poor countries are net food importers. Eliminating agricultural subsidies would reduce production and increase the price of agricultural goods to the detriment of net food importers. Second, many rich countries apply lower tariffs to exports from developing countries. Reducing overall tariff levels would narrow the margins of these preferences. Finally, due to the small scale of agricultural production in most developing countries, the prospects for competing on global markets are poor. However lower tariffs could lead to cheaper imports of competing products, leading to a reduction of farmers’ incomes. The Carnegie model showed that developing countries could shield certain crops essential to farmers’ incomes without significantly diminishing the benefits to other countries of agricultural liberalization. Most market gains for farmers in wealthy countries will come from exports to other wealthy countries.
Ms. Polaski concluded that for the benefits of liberalization to be realized, more must be done to accommodate the defensive needs of developing countries. Specifically, she recommended allowing exemptions for key special products, sequencing liberalization such that poor countries are granted access to rich country markets before being required to open their markets and extending duty free-quota free treatment to exports from least developed countries (LDCs) and other preferences to countries just above the LDC threshold.
Mr. Boussard challenged the assumptions that underlie the Carnegie and other econometric models of international trade. He pointed out that risk and uncertainty characterize agricultural markets, with particularly negative effects in developing countries where the poor cannot borrow or insure themselves against such risks. This impedes capital accumulation that is necessary for farmers to become more productive. As a result, he stated, the models are too optimistic. Furthermore, he argued that models such as Carnegie’s are ill-equipped to model the effect of stabilizing government interventions, such as supply or price management, which he described as necessary in agricultural markets.
Mr. Van der Mensbrugghe pointed out that modelers are aware of the limitations of models, particularly the constraints created by poor data coverage in poor countries. He emphasized that models built to answer specific questions usually generate robust findings, but cautioned against trying to build general equilibrium models comprehensive enough to address all trade-related policy questions. Furthermore, what more country and sector-specific models reveal, he argued, is that liberalization policies should be tailored to fit individual countries and sectors.
Session 1 Q&A
In response to a question on the impact on consumers of higher protective agricultural tariffs in developing countries, Ms. Polaski argued that where farmers constitute a large part of the population, the effect on producers will outweigh the effect on consumers. Mr. Van der Mensbrugghe, on the other hand, contended that in many countries, such as Nicaragua, the rural sector consumes more food than it produces and higher agricultural prices would reduce national welfare.
Asked if agricultural producers in wealthy countries are so productive relative to their counterparts in the developing world because of the large subsidies they receive, Ms. Polaski pointed out that subsidies are part of the problem but that a host of other problems hamper agricultural production in developing countries. These include the small size of land holding, lack of irrigation, lack of infrastructure and poor capital accumulation. Eliminating agricultural subsidies in wealthy countries would not equalize the productivity of farmers in rich and poor countries.
A number of questions directed at the panelists asked whether the growing consensus that trade liberalization must be approached differently in each developing country challenges the validity of the multilateral trading system. Panelists generally agreed that the WTO continues to play an indispensable role. Mr. Boussard argued that the WTO should allow for more government regulation and intervention to complement economic liberalization and compensate parties negatively affected by liberalization. He also encouraged modelers to expand their measures of development beyond simple GDP indicators to also include measures of human and social capital. Ms. Polaski argued that global multilateral negotiations should continue but that additional flexibility should be built into a Doha agreement so that developing countries can act with sovereignty to adjust to liberalization and promote development.
Session II: Doha Round proposals on agriculture
The program’s second panel explored some of the proposals on the table in the Doha Round for mitigating the negative impact of agricultural liberalization. Sherman Katz chaired a panel consisting of Jason Hafemeister, Jean-Marc Trarieux, Alexandra Strickner, Anne Wagner, and Anil Singh.
Mr. Hafemeister began his remarks by stating that the foundation of the US negotiating stance is a desire for an open and competitive system for world agricultural trade. After describing progress on the issues of export subsidies and trade distorting domestic subsidies he asserted that the Doha round collapsed due to a failure to secure market access improvements. He characterized the G-20 and G-33 tariff cut offers as insufficient and insisted that tariff cuts must reduce applied, not just bound rates. Mr. Hafemeister conceded that in a few cases liberalization might force farmers in poor countries to compete with cheap imports of agricultural goods that are central to their incomes. However, rather than exempt those goods from import competition by designating them as special products, he suggested that imposing small quotas for those goods would shelter domestic producers while still allowing foreign producers to compete for a small slice of market share. According to Mr. Hafemeister, large percentages of US agricultural exports to key developing countries fall under just a few tariff lines, making any proposal that reduces market access for even a handful of those tariff lines unacceptable to US negotiators.
Mr. Trarieux opened his presentation on the European perspective on Doha with assurances that the EU regrets the suspension of the talks and has not given up on the round. According to Mr. Trarieux, the EU is taking steps to reduce agricultural production and withdraw from participation in world export markets. He explained how these policy changes, which include subsidy and tariff reductions, would create opportunities for developing countries to expand their agricultural exports.
After a brief description of the special product and special safeguard mechanisms, Ms. Strickner devoted the bulk of her presentation to evaluating the likely efficiency of these proposals. She questioned the viability of the existing safeguard mechanism, pointing out that detecting an import surge and activating such a mechanism would require data and institutional infrastructures beyond the capacities of many developing countries. She also highlighted the centrality of the long term decline in agricultural prices to the problems facing farmers in poor countries. Though elimination of subsidies might boost agricultural prices by reducing global production in the short run, there is no guarantee that oversupply will not reemerge. Ms. Strickner described increased policy flexibility for developing countries as necessary. She mentioned that the African group at the WTO had proposed a re-examination of commodity agreements as a way to manage prices over the long term.
Mr. Trarieux posed a number of questions to Mr. Hafemeister probing the differences between the US and EU stances on special and differential treatment for LDCs. Specifically, Mr. Trarieux asked why the US decided to scale back its Duty Free-Quota Free proposal to cover only 97% instead of 100% of imports from LDCs. Mr. Hafemeister responded that the US market is already very friendly to foreign imports, noting the size of the US trade deficit. Mr. Katz suggested that it would be difficult for the US to convince trading partners to forego the special product or safeguard mechanisms while still maintaining its own barriers to LDC exports. Ms. Strickner pointed out the parallels between the US argument that the special product rule would allow developing countries to shield large parts of their markets in practice, and the developing country argument that extending DFQF treatment to only 97% of LDC exports would severely curtail the benefits of the program.
Ms. Wagner rejected the special product and safeguard mechanisms under discussion as failing to protect adequate sovereign policy space for developing countries. She argued that an export-based model for development leads developing countries to overlook issues of rural development, food security and poverty. Only by creating space for government regulation and intervention in markets can these issues be addressed, according to Ms. Wagner. She also refuted Mr. Hafemeister’s argument that exempting a handful of tariff lines under the special product rule would protect wide swaths of the agricultural market. Milk and milk products, for example, span 37 different tariff lines. Mr. Hafemeister had argued that with just 5 exempted tariff lines market access would be dramatically limited.
A series of questions directed at Mr. Hafemeister from Mr. Singh and audience members focused on the interactions between US subsidies and the reluctance of developing countries to lower tariffs. The latter took the position that developing countries cannot offer increased market access as long as US agricultural exports receive such large subsidies. Mr. Hafemeister countered that only improvements to market access in developing countries would make reductions to US subsidies politically palatable. Mr. Singh opened his remarks by expressing concern that current trade negotiations prioritize the interests of multinational corporations over those of peasants and farmers. The dramatic growth in the operations of these corporations, according to Mr. Singh, has left poor farmers with few opportunities beyond exploitative contracting arrangements with the same corporations. Mr. Singh closed by arguing that agricultural goods should be exempted from trade negotiations to ensure security and stability for poor farmers.
Session II Q&A
Audience comments included a proposal to consider innovative ways of managing global agricultural supply; a rebuke of the position that countries’ food security should be subject to commercial negotiations; and a reminder that trade should be thought of as a tool for promoting development, not an end in itself.
Session III: Other policy instruments for a changing world of agricultural trade
The final panel of the program dealt with alternative policies aimed at supporting agricultural producers, ranging from capacity and infrastructure development to national regulatory mechanisms. The panel included Henri Rouille D’Orfeuil, Daniel Lederman, Germano Batista, Marcel Groleau, Kathy Ozer, Vore Seck, K.S. Gopal and Arlene Alpha; the session was chaired by Cheryl Morden. Ms. Morden framed the final session as offering an opportunity to look beyond the Doha Round and think more generally about how to expand trade opportunities for small farmers.
Mr. Rouille D’Orfeuil’s presentation focused on strategies for rethinking the global agricultural trade architecture to better serve the 3 billion people in the world that depend on farming for their livelihood. He emphasized that any trade regime that marginalizes half the world’s population will eventually jeopardize stability and growth across the world. Mr. Rouille D’Orfeuil identified two questionable assumptions upon which the current system has been built: markets are self-regulating and increasing trade drives increased development. Instead of this market-based framework, Mr. Rouille D’Orfeuil proposed a multilateral trading system that would prioritize the sovereignty of countries and price stability in agricultural markets.
Mr. Lederman offered four new ideas to promote welfare in developing countries. First, he posited that government resources should be invested in sectors based on the sectors’ contributions to national welfare, broadly defined to include measures of equality and sustainability in addition to income. Sectors that efficiently leverage public resources to promote national welfare should enjoy more support from the government. Second, he argued that traditional national income accounting systematically underestimates the agricultural sector’s true contribution because it overlooks the linkages between agriculture and other components of national welfare. For example, growth in the agricultural sector has a disproportionately large impact on reducing poverty and improving rural security and stability. Also, because agricultural goods constitute such a large percentage of developing country exports, a competitive agricultural sector helps relax balance of payments constraints on development. Third, he explained that whereas the provision of public goods can remedy market failures in rural areas dependent on agriculture, subsidies to the private sector can actually reduce efficiency because they reduce firm’s incentives to invest. Finally, Mr. Lederman pointed out that despite the empirical evidence supporting greater investments in transportation infrastructure, education and rural health clinics, political realities tend to favor the efforts of private firms to secure subsidies for themselves. Developing countries must pursue policies that enhance the ability of their citizens to monitor political decisions by improving transparency and access to information.
The presentation of Mr. Batista dealt with the specific case of Brazil’s experience with agricultural liberalization. Agricultural corporations have played an increasingly influential role in shaping the course of agricultural development in the country, employing large portions of the farming population and consolidating control over production. However, successful models of family farming do exist in Brazil. Mr. Batista argued that government policy should focus on building commercialization channels for these family farmers.
In response to a comment that unreasonably low agricultural prices trap farmers in poverty, Mr. Lederman argued that the greater challenge to farmers is posed by the volatility of agricultural prices. The constraints of biology and the growing and harvesting cycles make it difficult to adjust the supply of agriculture in response to changes in demand; the result is higher price volatility. Mr. Lederman agreed that more price stability would be desirable but returned to his earlier point that government expenditures on public goods increase welfare more efficiently than expenditures on private subsidies such as price support subsidies.
Mr. Groleau and Ms. Ozer’s presentations introduced the perspectives of farmers’ organizations to the discussion. Mr. Groleau described the supply management system that governs the Canadian milk industry. In this system, farmers work with the government to match production levels with demand levels. Mr. Groleau pointed out that rather than creating a market distortion, this type of intervention actually enhances efficiency by avoiding overproduction. Ms. Ozer stated that dairy farmers in the US need a supply management system similar to Canada’s. The concentration of industry power in the hands of a few large agriculture firms has created problems in the developed world as well as the developing world, according to Ms. Ozer. Small family farms in the US, unable to match the efficiency of more capital-intensive operations, have seen incomes fall due to the persistent decline in agricultural prices.
Ms. Seck, Mr. Gopal and Ms. Alpha discussed the state of agriculture in the developing world from their points of view as leaders of national NGO platforms. Ms. Seck highlighted some of the specific problems facing African farmers. These include foreign tariffs that incentivize production of low-value added goods, erosion of preferences, and the spread of farming techniques that place growing stress on land and other factors of production. She proposed that incorporating more participatory mechanisms into trade policy negotiations could help to address of these problems. Mr. Gopal suggested that those who study trade policy and negotiations keep in mind the aggression with which businesses pursue profit maximization. He questioned whether economic analyses of these issues sufficiently grasp this dynamic. Ms. Alpha called on small farmers to do a better job of organizing, communicating and raising their collective voices to engage policy makers on these questions.
Concluding Remarks
In her closing remarks Ms. Polaski reminded the audience that the global environment has changed considerably since the Doha round was launched in 2001. The stated development objectives of the talks have given way to traditional mercantilist bargaining. Foreign aid to rural development is at the lowest level in thirty years. As a result, we risk exacerbating rather than reducing global poverty.
Looking ahead, Ms. Polaski flagged the need for better analysis to understand the heterogeneity that exists across countries. She also suggested that higher levels of both national and international assistance to agricultural development are needed. Pragmatic new ideas for agricultural policy are required based on the unique challenges and market failures in the sector and its concentration of poverty. In his closing remarks, Mr. Rouille D’Orfeuil encouraged attendants to continue to reach out across national and regional borders to pool knowledge and resources in the effort to help poor farmers in developing countries.
