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Chapter 13. Agricultural reform in Asia[224]


13.1 Introduction

During the past two decades, Asia has enjoyed substantial gains in food production and real incomes. Growth in food production outpaced the 43.1 percent increase in population from 1979 to 1999, permitting absolute per capita gains in cereal production and calorie consumption. Several factors account for this growth, including long-term investments in infrastructure, education and agricultural research. In China, India and other large Asian countries, the evidence suggests that trade and related economic reforms also played an important role in these positive developments.

Yet, in spite of the progress achieved, 26 percent of Asia’s population lives on less than one dollar per day. Forty-four percent of the world’s poor live in South Asia alone. In this situation, the impact of economic policies on food security at the household level is an especially important issue.

The majority of Asian governments have intervened in markets to stabilize food prices or operate public food distribution programmes to address the perceived social and political risks of food shortages, particularly in major urban centres[225]. Economic reforms in the past two decades have reduced the scope of these interventions in many countries, however. This section highlights the experiences of several countries that conducted major reforms, including Bangladesh, India, Indonesia, Sri Lanka and Viet Nam. The discussion focuses on specific agricultural trade and pricing policies, rather than on the impact of broad trade and macroeconomic reforms.

Disentangling the impacts of policy reforms is complex. Announced policy reforms are not always fully implemented. Moreover, other factors, including positive or negative shocks (e.g. terms of trade, weather) and medium-term effects of past policies, can confound the analysis, making simple before and after comparisons potentially misleading. Simulation models or cross-country statistical analysis can more fully address the counterfactual question of what would have occurred in the absence of reforms, but require substantial data and ultimately depend on how well actual economic behaviour is captured by model equations[226].

13.2 Food production, availability and poverty in Asia

Table 13.1 presents data on food production and availability for selected countries in Asia. Overall, average annual growth in rice production, the major food staple in much of Asia, substantially exceeded population growth in the 1980s, but was less than population growth in the 1990s. Growth in total cereal production exceeded population growth in both decades. This growth in cereal production also outpaced total cereal demand, so that net imports as a share of production fell from a 10.9 percent average between 1988 and 1990 to only 8.9 percent between 1998 and 2000. Moreover, Asia’s rice exports more than doubled from 8.7 million tonnes in 1988-90 to 19.0 million tonnes in 1998-2000. Overall, across Asia, per capita calorie consumption increased dramatically, from an average of 2 269 calories per person per day in 1978-80 to 2 710 in 1998-2000.

Table 13.1 Calorie consumption, production and population growth rates, selected Asian Countries, 1978-2000



Growth Rates

Calories per capita per day

Calorie Intake

Population

Cereal production

Rice production

Bangladesh

1978-80

1 986

-

-

-

-

1988-90

2 060

2.75

2.56

2.75

2.59

1998-2000

2 101

3.09

2.29

3.09

2.88

1978-80

2 291

-

-

-

-

China

1988-90

2 661

2.97

1.46

2.97

-0.43

1998-2000

3 030

1.78

1.06

1.78

3.68

India

1978-80

2 086

-

-

-

-

1988-90

2 317

3.39

2.07

3.39

3.88

1998-2000

2 426

1.97

1.82

1.97

1.81

Indonesia

1978-80

2 153

-

-

-

-

1988-90

2 607

4.96

2.00

4.96

4.88

1998-2000

2 904

1.97

1.56

1.97

1.45

Sri Lanka

1978-80

2 350

-

-

-

-

1988-90

2 246

1.74

1.55

1.74

1.77

1998-2000

2 360

1.64

1.12

1.64

1.75

Viet Nam

1978-80

2 059

-

-

-

-

1988-90

2 207

5.41

2.21

5.41

5.35

1998-2000

2 537

5.59

1.78

5.59

5.36

All Asia

1978-80

2 269

-

-

-

-

1988-90

2 532

2.99

1.86

2.99

2.81

1998-2000

2 710

2.07

1.76

2.07

1.62

Source: FAO. 2002.

There was substantial variation in the 1990s in growth rates across countries, however. Growth in per capita cereal production in the 1990s varied from only 1.06 percent per year in China to 2.29 percent per year in Bangladesh, while growth in calorie consumption per capita ranged from 1.64 percent per year in Sri Lanka to 5.59 percent per year in Viet Nam.

13.3 Trade and related reforms in selected Asian countries

The major factors behind these trends in food production are well-known: long-term investments in infrastructure, education and agricultural research, coupled with rapid labour-intensive growth and productivity increases in non-agricultural sectors often associated with outward-oriented development strategies. The specific role that trade and related economic reforms played is far less well understood. The experiences of several countries suggest, however, that specific agricultural trade reforms have often led to increased real incomes and improvements in food security.

India

In India, agricultural production, especially rice and wheat production, have increased dramatically since the Green Revolution, which involved improved seeds, fertilizer use and irrigation, began in the 1960s. Market reforms did not begin, however, until the late 1980s, when broad trade liberalization and exchange rate depreciation initiated a period of reforms[227].

Reforms in rice and wheat have focused mainly on liberalization of the export trade as surpluses have emerged. India’s Public Food Distribution System (PFDS) is oriented toward quantities distributed, though the influence of the Food Corporation of India (FCI) on domestic markets is larger than the PFDS’s influence in Bangladesh[228]. Good weather and high procurement prices in the second half of the 1990s led to a sharp increase in government procurement, from an average of 17.2 million tonnes per year from 1980 to 1992 to an average of 26.6 million from 1993 to 2000. However, domestic distribution remained at approximately the same levels, so that average net procurement rose from 0.7 million tonnes per year to 10.4 million tonnes per year. As a result, public food grain stocks grew rapidly, from 11.8 million tonnes at the start of 1993 to 45.7 million tonnes at the start of 2001, and to 54.4 million tonnes by the end of February 2002. As stocks increased, the Government of India took increasingly active measures to promote exports. For example, in 2000/01, state trading parastatals were permitted to buy wheat at the below-poverty-line (BPL) price for export.

High duties on imported edible oils have encouraged a “yellow revolution” of increased oilseed production. From 1980 to 1994, domestic costs of producing oilseeds (rapeseed, mustard seed, groundnuts, sunflower, but not soybeans) were on average greater than the cost of imports. The duty on edible oil imports was lowered from 65 percent in 1994 to 20 percent by 1996. Edible oil farmers are likely to lose from such a policy unless processing and marketing margins for edible oil processors (inflated far above margins in other countries by restrictions on stocking limits, imports of seeds, bans on forward trading, etc.) are reduced.

Nonetheless, using a multi-market model of Indian agriculture, Gulati and Kelley[229] estimate that if India completely liberalized trade in agriculture, both agricultural imports and exports would increase relative to their base 1991-94 levels; the value of agricultural production would increase by 13 percent; and rural incomes would increase by about 3 percent. Surprisingly, the overall cost of living does not rise in the simulation because the policy scenario includes a hypothetical optimal rice export tax that keeps domestic rice prices from rising, and because import liberalization of edible oils and pulses actually lowers domestic prices.

Bangladesh

Liberalization of agricultural input markets and trade liberalization in rice helped Bangladesh increase domestic cereal production and reduce variability of supply. A gradual liberalization of markets for modern inputs in agriculture was carried out between 1978 and 1990 under pressure from foreign donors and with the realization that various direct interventions were fiscally unsustainable and unproductive in the long run. These reforms greatly reduced the role of the Bangladesh Agricultural Development Corporation in marketing and distribution of fertilizer, irrigation equipment, power tillers, pesticides and seeds. Liberalization and privatization of input markets coincided with a large expansion in tube well irrigation and winter (boro) season rice cultivation in the late 1990s[230].

Following broad trade liberalization in the 1990s, Bangladesh has successfully used private sector trade to help stabilize rice and wheat prices following major production shortfalls, reducing need for large government stocks[231]. Food grain (rice and wheat) is typically procured at fixed prices through direct purchases of grain from farmers or traders. Until the early 1990s, subsidized sales of grain through ration programmes were the major distribution channels. As part of reforms undertaken in the early 1990s, however, major ration channels were shut down and by the end of the decade approximately 85 percent of public sector distribution was targeted to poor households through direct distribution channels such as Food for Work and Food for Education.

No attempt is made to support a floor price or defend a ceiling price through unlimited purchases or sales. The Government’s impact on market prices has greatly diminished, however, as the size of the PFDS has fallen while the amount of rice in private markets has sharply increased[232]

Private imports of wheat and rice were liberalized in the early 1990s. Then, in 1994, private food grain exports were liberalized in India as part of an ongoing broader macroeconomic reform including exchange rate depreciation. As a result of the liberalization of the Bangladesh import trade and India’s export trade, India replaced Thailand as the main source of Bangladesh rice imports due to lower transport costs and quicker delivery to Bangladesh. Following several large domestic shortfalls of rice, domestic rice prices in Bangladesh rose to import parity levels, providing incentives for private sector imports. Thus, private imports surged in years of large domestic shortfalls and fell to zero in normal production years when domestic prices fell below import parity.

Private sector imports were especially important for national food security following the floods of 1998, which destroyed more than 20 percent of the monsoon season rice crop (about 10 percent of the annual production). Following the flood, the Government of Bangladesh adopted the cautious strategy of moderate government imports to supply government distribution channels while actively encouraging private sector imports through a policy of zero tariffs and other measures. By following this trade-oriented stabilization strategy, Bangladesh was able to increase domestic supplies quickly and successfully stabilize prices.

Several conditions led to the success of this strategy. First, India had sufficiently good harvests at a low cost and the policy climate that encouraged private exports. Second, private sector trade in Bangladesh was competitive, involving hundreds of small traders importing small quantities of rice. Third, the Government had clear political will to encourage private import trade through removing tariffs and surcharge and pushing customs officials to expedite imports of rice. Fourth, Bangladesh had sufficiently large foreign exchange reserves to pay for rice imports[233].

Sri Lanka

Sri Lanka historically relied on imports to supplement domestic production of several major and basic food commodities such as rice, milk and fish. From Independence in 1948, Sri Lanka’s food security strategy was based on three major policies: achieving self-sufficiency in basic food items; public distribution system for procurement and marketing of paddy and other commodities; and welfare programmes involving a food subsidy, food stamps or income transfers[234].

Major economic reforms in Sri Lanka began in 1977 with broad trade liberalization, exchange rate devaluation, and a new foreign investment regime. The country continued its policy emphasis on food self-sufficiency, however, with major investments in irrigation in drier parts of the country, fertilizer subsidies and allocation of most agricultural research resources on non-plantation crops to rice. Self-sufficiency in rice was nearly achieved in 1985 with only 3 percent of consumption deriving from imports that year.

The Paddy Marketing Board (PMB), which operated a Guaranteed Price Scheme of procurement and sales to support producer prices and provide milled rice at “fair prices” for consumers, was gradually phased out. Though it procured as much as 10 percent of total paddy production in 1995, purchases were only about two percent of production in the early 1990s, and the PMB ceased to function in 1997[235]. A universal food subsidy on essential consumer goods, in place since Independence, was abolished in 1977 and replaced by a food stamp scheme in 1979, targeted to about 10 percent of households. Other reforms consisted of adding welfare measures such as school mid-day meals and uniforms in 1989, and scaling up the programme to a national level in 1995.

Tariffs on agricultural imports were gradually reduced through 1993, and under the Uruguay Round Agreement on Agriculture, Sri Lanka bound all tariffs on agricultural goods at a uniform rate of 50 percent as of 1 January 1995 and subsequently removed quantitative restrictions on all agricultural products except wheat and wheat flour. Until 1990, a government parastatal held a monopoly on rice imports. Thereafter private traders were allowed to import rice with the Government varying the import duty between 12 and 20 percent to keep the price of imported rice slightly above the price of rice milled from paddy at the purchase price of the PMB[236]. In recent years, Sri Lanka has raised the import tariff on rice to keep low cost exports from India from depressing rice prices for its producers.

Indonesia

In Indonesia, macro-instability led to a temporary reversal of long-standing policies promoting private food trade, ultimately leading to liberalization of private imports and the creation of a nation-wide targeted food subsidy. Over a span of nearly three decades, from the late 1960s up until 1997, Indonesia made significant progress in increasing domestic food production, stabilizing food prices, reducing poverty and increasing food security. Through the National Logistics Agency BULOG (Badan Urusan Logistik), the Indonesian Government stabilized rice prices through the purchase of grain at harvest and open market sales in urban areas during lean periods, with a relatively small role for direct distribution of rice to “budget groups”, (civil servants and the military). BULOG maintained availability of rice through its monopoly on commercial imports and, when rice surpluses emerged in the mid-1980s, BULOG exported domestically procured rice to reduce domestic supplies and maintain adequate producer price incentives[237]. Equally important, substantial investments in irrigation and extension services enabled rapid increases in agricultural productivity and rural incomes. Poverty rates in rural areas fell from 59 percent in 1970 to 12 percent in 1996; urban poverty rates fell from 51 percent to 9 percent over the same period[238].

The Asian financial crisis of 1997 and 1998 abruptly ended this long period of progress. Domestic rice harvests in these years were reduced following the El Niño weather system that delayed or reduced monsoon rains, making it necessary to import rice to stabilize domestic rice prices. However, capital flight led to a shortage of foreign exchange and the depreciation of the rupiah, greatly increasing the fiscal costs of imports. The Government responded by imposing sweeping controls on food trade and marketing (reversing its decades-old policy of promoting private trade), and trying to stabilize prices through sales of its food stocks. From mid-1997 to mid-1998, the Government kept domestic food prices at 50 to 60 percent of import parity levels through these trade and price controls, but the difference between domestic and international prices led to large-scale smuggling of rice and other food goods out of the country[239]. The Government was unable to supply enough imported rice to domestic markets, and in mid-1998, domestic rice prices rose sharply. Short-run food security in Indonesia and the Philippines was greatly affected by the interaction between foreign currency supplies, food import prices, and domestic food production.[240]

By August 1998 the Government abandoned its general food price subsidy policy, replacing it with a targeted rice subsidy programme (Operasi Pasar Khusus - OPK). Shortly thereafter, in September 1998, the Government announced that BULOG would no longer procure food commodities other than rice in domestic markets and that trade in foodstuffs would be liberalized, ending BULOG’s monopoly on rice imports. By January 2000, rice imports were fully deregulated (though with a 30 percent import tariff) and the OPK became the Government’s single most important instrument for food security, reaching more than 10 million households with 20 kilograms of subsidized rice per household in 1999.

Viet Nam

Liberalization of Vietnamese agriculture took place over two decades, beginning with the introduction of the contract system in 1981, by which cooperatives contracted farm households to produce a specified amount of crops on the household’s own plots, but any surplus could be sold on the open market. In 1988, as part of the doi moi (renovation) policy first announced in 1986, farm households were recognized as the basic unit of agricultural production, and farmers were allowed to buy, own and sell agricultural inputs, and allowed to sell 40 percent of production produced under contracts on cooperative-owned land. A year later, the Government ended compulsory purchase of farm products, and private traders were allowed to purchase directly from farmers[241].

Rice production grew 57 percent during 1985-95, (4.6 percent per year), and per capita food production increased from by 21 percent over the same period[242]. Rice surpluses emerged and in 1989 Viet Nam began exporting rice, made profitable by a substantial depreciation of the currency, in 1989. By 1997, Viet Nam had become the world’s second largest rice exporter after Thailand. Rice exports remained largely under the control of the Government, however, with the volume of allowable rice exports fixed by an export quota. Prior to 1997, rights to export rice under the national quota were allocated only to regional and provincial state-owned trading enterprises, and in 1999 private firms still accounted for only 4 percent of total rice exports. The rice export quota (and a fertilizer import quota) was removed in May 2001, but the Government is still involved in nominating state owned food companies to trade in Thailand’s major export markets[243].

Multi-market model simulations by Minot and Goletti showed that eliminating the rice export quota would raise domestic rice prices by 14 to 22 percent (depending on whether internal marketing restrictions were also removed) and have a negative effect on urban households, non-farm rural households and households in the central highlands of Viet Nam. Net gains to farmers and consumers, however, would be US$200 million; three-quarters of this net gain would represent a transfer from the state-owned enterprises that received the implicit export quota rents (estimated to be the equivalent of a 22 percent export tax). The overall net effect on poverty of export liberalization was found to be negligible or slightly positive.

Several lessons can be drawn from the Viet Nam experience. First, a relatively equal distribution of land assets is a key ingredient for reform to reduce poverty. The landless population is only 2 percent compared with rates of about 20 percent in many other Asian countries. Second, in order for market reform to lead to a major increase in production, other conditions (such as the good irrigation and extension systems in Viet Nam, and the well-educated labour force) should be in place. Third, an export-oriented development strategy can be consistent with food security and with smallholder production. The impacts of such a policy will likely vary substantially across regions and have important distributional consequences.

13.4 Conclusion

Long-term investments in agricultural research and rural infrastructure (roads and irrigation), coupled with price policies providing adequate incentives for domestic production have led to substantial gains in food production and real incomes in many Asian countries. Nonetheless, there are marked differences in policy regimes across countries. For example, Indonesia combined Green Revolution rice technology and rural investments with policies favouring private market development (up until the late 1990s). India also invested heavily in irrigation and extension to spur adoption of rice and wheat varieties, but the Government intervened heavily in grain markets and placed restrictions on private trade. In general, the five case studies suggest that trade liberalization (or more broadly, a liberalized domestic and international trade regime) may enhance food security (e.g. through stabilization of markets in Bangladesh, or increasing real incomes of farmers in Viet Nam), though substantial increases in food production were achieved by India before trade liberalization began in the late 1980s.

Whether liberalized trade regimes played a major role or not, increases in domestic food production have increased availability of food at the national level across many countries in Asia. Deeper world markets for rice and other grains, availability of foreign exchange from increased export earnings, and trade liberalization have also helped to stabilize availability of food through more reliable opportunities for imports in years of domestic production shortfalls. As a result, availability of food at a national level is no longer a binding constraint for food security in most countries in most years.

Yet, in spite of rapid overall economic growth, access to food is a major problem for hundreds of millions of poor people in Asia. External and domestic market reforms appear to have contributed to both overall economic growth, as well as agricultural growth, in Bangladesh, China, India, Viet Nam and elsewhere. Policy reforms in the 1990s also made possible the rapid response of private sector rice imports to serious production shortfalls in Bangladesh in 1997 and 1998 that, by limiting rice price increases, made a substantial contribution to access to food by the poor and calorie consumption. Reliance on international markets still entails risks, however. Macroeconomic instability and rapid exchange rate depreciation made large scale rice imports too fiscally costly for Indonesia in the late 1990s. Neither China nor India can purchase substantial amounts of their food grain needs on world markets without driving up world prices significantly.

Thus, there remains a perceived need for public interventions by many governments to address the risk of variations in availability as well as chronic poverty and household food insecurity. Evidence suggests that such interventions have enhanced food security at the household level to some extent in some countries. Food market interventions and direct distribution of food are not adequate instruments in themselves, however, to address the massive problems of household food insecurity caused by inadequate access to food. Reducing poverty and food insecurity in Asia will require continued broad-based, labour-intensive growth, particularly in rural areas. Market reforms have contributed to the progress achieved to date, but much remains to be done.


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[225] Islam, N. & Thomas, S. 1996. Foodgrain Price Stabilization in developing Countries: issues and Experiences in Asia. Food Policy Review 3. Washington DC: International Food Policy Research Institute.
[226] Sahn, Dorosh & Younger, 1997 op cit.
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[235] Kelegama, 2000. op cit. p. 217.
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