Globalization in food and agriculture

The preceding chapter focused on the role of trade and trade policies as driving factors for increasingly integrated markets. This chapter on globalization will expand the analysis by identifying the other main factors that drive global economic integration and analyse their main effects on food and agriculture. These are presented in three major sections. The first part provides a definition of the process of globalization, placed in its historical context. Emphasis is given to the importance of factors that reduce transaction costs, notably on the impacts of new transportation and communication technologies. The second section presents the main features of globalization in agriculture, and discusses why some countries have been successful in integrating their food and agricultural economies into the rapidly growing world markets, but also why others have largely failed to do so. This includes factors such as openness to trade and capital flows, ability to adopt external expertise and technologies, but also the importance of factors relating to a country’s geographic location or its infrastructure endowment. The third part presents the options, the potential and the limits that developing countries are facing for future integration into global food and agriculture.

10.1 Globalization as an ongoing process

Globalization refers to the ongoing process of rapid global economic integration facilitated by lower transaction costs and lower barriers to movements in capital and goods. It has shown itself in a growing interdependence of the world’s economies, rapidly rising trade flows, increases in capital movements and an increasing internationalization of production, often organized within and between multinational corporations. To a large extent, globalization has been brought about by a massive reduction in transaction costs, which in turn was made possible through more efficient transportation and communication facilities as well as innovations in organizing complex logistical processes. Trade and capital flows have also been boosted by a systematic reduction in trade and investment barriers. This process has brought about massive income gains for those who participated. Broadly, the integration into a larger and more competitive market has increased the returns to investment for producers and provided consumers with a greater variety of products at lower prices.

This process of growing integration of the world economy has also given rise to numerous concerns. Most prominent is the concern about the growing marginalization of entire countries or societal groups within countries. There are in fact many countries that have been left out of the overall economic integration and growth process, in some cases, despite sincere efforts to open up to foreign trade and capital flows. Over the 1990s, rapidly integrating economies recorded a per capita income growth rate of more than 4 percent p.a. while the income available per person in less integrated countries shrank by 1 percent annually (World Bank, 2001e). The rapid growth in agricultural trade has given rise to concerns that diseases and pests will be hard to control and contain at the local level. Moreover, there are sociocultural concerns that globalization could destroy the cultural heritage (including dietary habits) as well as traditional societal and social links that have evolved over centuries. Finally, there is widespread concern about a growing economic, social and cultural dependence on a few dominant countries or corporations, which are seen to have the potential of disempowering entire societies.

While the term “globalization” has been coined only recently, its driving forces and its principal impacts are of older date. Similar developments, albeit of a more limited scope, have characterized global economic development in the past. In particular, innovations that reduce transaction costs (better transportation and communication technologies) have always had a strong accelerating impact on global integration. A look back also suggests that the process of economic integration is a non-continuous one. It is often a process of waves that occur when new technologies are widely adopted around the world. Similarly, trade and investment liberalization is being negotiated and implemented in rounds. The two developments, technological change and liberalization, can be mutually reinforcing and create particularly noticeable waves of globalization. The current wave of globalization is driven by major technological breakthroughs in transportation and communication technologies (notably the Internet, mobile telephone technology and just-in-time systems) in tandem with various efforts to liberalize international trade and investment flows.

The first wave of globalization during the second half of the nineteenth century. The first wave of rapid global integration began in the second half of the nineteenth century and was brought about by a combination of breakthroughs in transportation and communication technologies. Trade between continents was boosted by the shift from sail to steamships, which resulted in a tremendous decline in transatlantic transportation costs as well as faster and more reliable connections. Trade in agricultural commodities, typically bulky, perishable or both, enjoyed a particular boost. Transatlantic trade in grains and oilseeds – previously circumscribed by high transaction costs – shot up sharply. This brought new land into production, most notably in the Midwest United States and some parts of Australia.

Agricultural trade was further accelerated by the advent of the railways, which resulted in a further and sharp reduction of transportation costs within continents. Lower transaction costs heightened competition and brought about not only a significant downward pressure on prices, but also a growing convergence of commodity prices across continents. For example, in 1870, a bushel of wheat sold for 60 cents in Chicago but for double that price in London. The difference was largely a result of high transportation costs from Chicago to London. With railroads and steamships,¹ transport rates between Chicago and London fell to 10 cents a bushel between 1865 and 1900 and the price differentials for wheat declined accordingly (Henderson, Handy and Neff, 1996).

The decline in transaction costs also had significant impacts on the overall volume of intercontinental trade, market shares and income. United States exports of grain and meat to Europe, for instance, increased from US$68 million in 1870 to US$226 million in 1880, which boosted farmers’ incomes in the United States and the welfare of consumers in Europe. The new transportation facilities also reduced costs for internal shipments and, together with cheaper food supplies from abroad, increased food security at the local and regional level. For the first time in history, this brought about years of “lower agricultural production without famine” in Europe (Tilly, 1981).

Lower transportation costs also affected labour mobility and labour costs. Sixty million people migrated from Europe to North America and Australia to farm the newly available land. As land was abundant, it created an opportunity for many immigrants to earn an income that exceeded by far the wages they used to earn in Europe. In Europe itself, in turn, it created a relative labour shortage and an upward pressure on wages both in absolute terms and relative to land prices. Overall, immigration led to a narrowing of differences in wages in all globalizing regions. “Emigration is estimated to have raised Irish wages by 32 percent, Italian by 28 percent and Norwegian by 10 percent. Immigration is estimated to have lowered Argentine wages by 22 percent, Australian by 15 percent, Canadian by 16 percent and American by 8 percent” (Lindert and Williamson, 2001). Indeed, migration was probably more important than either trade or capital movements.

The backlash after 1914. With the end of the First World War, trade policy went into reverse and many nations stepped up border protection. The increase in tariffs was built on the notion that higher protection would help rebuild the domestic industries that had suffered or were destroyed during the war. The process started in Europe. France, Germany, Spain, Italy, Yugoslavia, Hungary, Czechoslovakia, Bulgaria, Romania, Belgium and the Netherlands all raised their import tariffs to levels comparable to those before the war. Even the United Kingdom, a free trade nation, declared that “new industries since 1915 would need careful nurturing and protection if foreign competition were not again to reduce Britain to a technological colony”.

In June 1930, when the United States Congress passed the Hawley-Smoot Tariff Act, the United States joined in the new protectionist wave. Agricultural tariffs were increased particularly sharply, both in absolute terms and relative to industrial ones. In reaction to the sharp increase in United States tariffs, other countries enacted retaliatory trade laws. The spiralling tariff increases put a brake on global trade and reversed much of the liberalization that resulted from the first wave of globalization. Between 1929 and 1933, United States imports fell by 30 percent and, more significantly, exports fell by almost 40 percent. The sharp decline in trade aggravated the internal economic situation, and the depression in the United States intensified and engulfed much of the rest of the then economically integrated world.

The second wave of globalization, 1945-80. The experience gathered from the reversal to protectionist policies during the interwar period gave an impetus to a new wave of internationalism after the Second World War. The new wave of trade liberalization was, however, more selective both in terms of countries participating and products included. By 1980, developed countries’ barriers to trade in manufactured goods had been substantially removed, but barriers for developing countries' agricultural products had been lowered only for those primary commodities that did not compete with agriculture in the developed countries. By contrast, most developing countries had erected trade barriers against imports from each other and from developed countries.

The resulting effect on trade flows was very uneven. For developed countries, the second wave of globalization was a spectacular success. Freer trade between them greatly expanded the exchange of goods. For the first time, international specialization within manufacturing became important, allowing scale economies to be realized. This helped to drive up the incomes of the developed countries relative to the rest of the world (World Bank, 2001e). For developing countries, it perpetuated the North-South pattern of trade, i.e. the exchange of manufactures for land-intensive primary commodities, and this impeded them in exploiting their comparative advantage in labour-intensive manufactures. In addition, as discussed below, many developing countries adopted a policy approach that was not conducive to a greater integration into the globalizing world economy.

The economic policy approach adopted in many developing countries during the 1950s and 1960s was strongly influenced by the work of Raul Prebish. Under the assumption of balanced trade and price stability, Prebish established the following relationship between the relative growth rates of an economy vis-à-vis its trade partners and the income elasticities for its exports and imports: g_i / g_w = e_x / e_m, where gi and gw are the trend growth rates of the economy and the rest of the world, and e_x and e_m the export and import income elasticities.

The policy message from this relationship was straightforward: if a country wants to grow more rapidly than the rest of the world, its export elasticity needs to be higher than its import elasticity. The actual situation in developing countries, however, was precisely the reverse. Typically, they exported primary goods with low income elasticities and imported manufactured products with high income elasticities. As a result, growth without a balance-of-payment constraint was assumed to be impossible without a continuous depreciation of the real exchange rate or the steady accumulation of foreign debt. This so-called “elasticity pessimism” was the main rationale behind the import substitution policies of this period.

For much of the 1950s and 1960s, import-substituting industrialization (ISI) was seen as a way out of this deadlock. ISI was based on the idea that domestic investment and technological capabilities can be spurred on by providing home producers with (temporary) protection against imports. Whether and to what extent ISI helped or hindered development remains controversial. On the one hand, the so-called “‘consensus view” emphasizes that ISI policies were at the heart of the problems that many of their adopters encountered in the subsequent decades when they opened up their economies (for example, see OECD, 2001c). On the other hand, there are claims (Rodrik, 1997; Hausmann and Rodrik, 2002) that ISI worked reasonably well, notably in raising domestic investment and productivity. It has been stressed that numerous economies in Latin America and the Near East recorded robust growth under ISI policy regimes.

There is, however, a broad consensus that ISI was an ineffective response to weather the economic turbulence of the 1970s, which witnessed the abandonment of the Bretton Woods system of fixed exchange rates, two major oil shocks and other commodity boom-and-bust cycles. For agriculture, ISI strategies meant higher input costs and therefore negative effective protection, i.e. implicit taxation. In conjunction with explicit taxes on output and exports, ISI strategies created a considerable burden for agriculture in many developing countries, put a brake on agricultural export growth and slowed their integration into global agricultural markets. On average, for the period from 1960 to 1984, the bias against agriculture depressed the domestic terms of trade for agriculture by 30 percent. In the extreme cases of Côte d’Ivoire, Ghana and Zambia, the average bias against agriculture reached levels of 52, 49 and 60 percent, respectively (Schiff and Valdes, 1997).

The current wave of globalization. The last two decades of the twentieth century marked the beginning of a new wave of globalization. Like the first wave about a hundred years earlier, it was brought about by a combination of lower trade barriers and numerous technological innovations that strongly reduced transaction costs for movements not only of goods but also of people and capital. This is particularly apparent from the substantial increase in international migration and capital movements, which were of less importance during the second wave of globalization. Unlike its predecessors, this wave of globalization included many more developing countries, even though not all of them were able to harness globalization to their benefit. Particularly countries in sub-Saharan Africa failed to participate, resulting in a further widening of their income gap with both integrating Asian economies and, even more so, the fully globalized economies of the North.

Most countries in East Asia were able to reap substantial benefits by exploiting their comparative advantage of cheap and abundant labour. Some countries in Latin America and the Near East/North Africa region were also able to integrate fast. A common feature of successful integrators is an above-average shift towards exports of manufactures. Countries such as China, Bangladesh and Sri Lanka already have shares of manufactures in their exports that are above the world average of 81 percent. Others, such as India, Turkey, Morocco and Indonesia are swiftly approaching the world average. Another important change in the exports of successfully globalizing developing countries has been their substantial increase in exports of services. In the early 1980s, commercial services made up 17 percent of the exports of developed countries, but only 9 percent of the exports of developing countries. During the third wave of globalization, the export share of services in the former group increased slightly, to 20 percent, but for developing countries the share almost doubled to 17 percent (World Bank, 2001e).

10.2 The main features of globalization and the correlates of success

10.2.1 Freer trade and outward-oriented policies

Chapter 9 has already dealt with the main developments in global agricultural trade, its importance within overall trade and the structural changes that have taken place over the past 40 years. It also provided an overview of likely trade developments for the next 30 years and the trade policy issues that are expected to arise from the projected shifts in trade flows. In this section, emphasis is placed on the potential role of trade for development and poverty alleviation.

The links between trade, development and poverty have been subject to an extensive and heated debate. While proponents and opponents agree on the central importance of freer trade for increasing global welfare, there is considerable disagreement as to whether and to what extent freer trade can be harnessed by individual countries as a means to promote development and fight poverty. There is also considerable disagreement as to how the transition towards freer trade, i.e. the speed, timing and sequencing of liberalization measures, should evolve. Some of these issues will be addressed in the following section.

The consensus view. Economists have been asserting for a long time that trade liberalization is good for economic development, particularly in developing countries. The benefits from openness are assumed to arise from the efficiency gains that flow from superior resource-allocation decisions in more open markets (Bhagwati and Srinivasan, 1999). The result is an increase in economic growth. More recently there have also been numerous empirical studies that suggest that openness to trade and investment flows has had a positive effect not only on economic growth but also in helping to fight poverty. Among the most influential empirical studies are those by Edwards (1998) and by the World Bank (Dollar and Kraay, 2000, 2001). Wolf (2000) summarizes much of this literature.

In view of its importance for the ongoing policy debate, the main conclusions of the World Bank study are summarized below. The first concerns the link between growth and openness. Dollar and Kraay examine this relationship using an econometric study covering a sample of 72 developing countries. Avoiding some of the pitfalls of earlier studies by using a single indicator of openness (the ratio of trade to GDP), the authors arrive at a number of important conclusions:

• Weighted for population, the per capita income of the group of “globalizers” grew at 5 percent a year in the 1990s, compared with 1.4 percent for the “non-globalizer” group.
• Growth rates for the globalizers have been steadily increasing since the mid-1970s, while those for the non-globalizers fell sharply in the 1980s and recovered only marginally in the 1990s.
• Per capita income among the globalizers is rising more than twice as fast as in industrialized countries, while the non-globalizers are falling further behind. On a population-weighted basis, countries that are open are growing 3.6 percent a year faster than others. On this basis, average income in a globalizing economy would double every 14 years, compared with 50 years in a non-globalizing economy: a growth gap that would have profound implications for poverty reduction.

The second conclusion concerns the relationship between economic growth and poverty reduction. On the basis of an econometric exercise analysing economic growth in 80 countries over a period of four decades, it is argued that, on average, the income of the poor rises on a one-to-one basis with overall growth. In other words, poor people capture a share of any income increment that reflects their existing share of income distribution. As the authors say: “It is almost always the case that the income of the poor rises during periods of significant growth” (Dollar and Kraay, 2001).

On closer inspection, however, some of the numbers look less impressive. One reason for this is that averages have the effect of obscuring important differences between countries, especially when samples are weighted for population (since this means that large countries such as China have a disproportionate influence). Using an unweighted average, the per capita growth rate for the globalizers in the 1990s falls to 1.5 percent. Moreover, ten of the 24 countries in the group have growth rates of 1 percent or less. Further disaggregation reveals that one-third of the “globalizing” countries have lower average growth rates for the 1990s than the “non-globalizing” group.

The critique of the consensus view. The basic critique of the consensus view is that the link between openness and growth is one of correlation but not, or at least not necessarily, one of causation. Simply put, openness is essentially an economic outcome, captured (in the case of the World Bank study) by the ratio of trade to GDP, but not an input, i.e. a policy tool to arrive at higher growth.²

When focusing on the causal relationship between trade policy, growth and poverty reduction, the critics of the consensus view claim that it appears to be an upside-down version of reality (Rodrik, 2001 and Oxfam, 2002). In fact, they stress that some of the most successful globalizers are anything but radical liberalizers, while many of the most radical liberalizers have actually achieved very little in terms of economic growth and poverty reduction. They claim that no country has ever developed simply by opening itself up to foreign trade and investment and that practically all of today’s developed countries embarked on their growth behind tariff barriers, and reduced protection only subsequently (Rodrik, 2001).³

There are also many examples in agriculture, where appropriate domestic policy settings and the timing and sequencing of liberalization steps have proved to be more important than a complete and immediate reduction of border protection. Some of today’s most successful agricultural exporters (e.g. China and Viet Nam) established their international competitiveness under protection and import substitution regimes and embarked subsequently on “policy reforms”.⁴ In many cases, success was built on a promotion of export-led growth combined with a domestic investment and institution-building strategy to stimulate entrepreneurship and the willingness to assume risks. Another important factor has been that mechanisms are put in place to ensure that excess capacities are cut back, and to create exit possibilities for non-performing sectors or actors, and that the opening-up process to international competition is phased in a determined manner (for examples, see below).

Notwithstanding the importance of temporary trade protection measures, the proponents of fast and full liberalization stress that no country has developed successfully by turning its back on international trade and long-term capital flows. Very few countries have grown over long periods of time without experiencing an increase in the share of foreign trade in their national product. In practice, it is hard to imagine that a country can create and sustain growth if it remains shut off from the forces of competition that help to innovate and upgrade its productivity. Moreover, it is equally hard to imagine that developing countries would not benefit from imported capital goods that are likely to be significantly cheaper than those manufactured at home. Policies that restrict imports of capital equipment raise the price of capital goods at home and thereby reduce real investment levels. Exports, in turn, are important since they permit the purchase of imported capital equipment.

The agricultural sector in many developing countries has been particularly adversely affected by the inward-oriented industrial development strategies of the 1950s and 1960s. In some countries the anti-agriculture bias remained a policy feature throughout the 1970s and 1980s (Schiff and Valdes, 1997). Import substitution policies for manufactures restricted capital good imports for agriculture, raised input costs and resulted in often significant negative effective rates of protection. This held back real investment levels in agriculture and slowed export performance in many developing countries. In some developing countries, industrial protection and restrictions on capital good imports for agriculture were accompanied by direct taxation of agricultural exports, placing agriculture at a disadvantage both relative to other sectors and vis-à-vis developed country competitors.

Openness and development in agriculture – some country examples. Viet Nam’s rapid economic and agricultural development over the 1990s is now commonly regarded as one of the most successful development stories of the last decade. Annual GDP growth has been consistently high throughout the 1990s, averaging 7.6 percent. Over the same period, agricultural output has been growing at almost 5 percent per year, far outstripping demand in local markets (Government of Viet Nam, 2001). Poverty has declined substantially and the number of undernourished has dropped by 3 million people (FAO, 2001a).

Export markets provided an important source of demand to sustain growth. Over the 1990s, the value of agricultural exports shot up by a factor of 3.5 and, for a number of commodities such as coffee and rice, Viet Nam emerged as a leading exporter in world markets. By the end of the 1990s, rice and coffee exports combined generated about US$2 billion in foreign exchange earnings (1997/99 average), accounting for nearly 20 percent of the country’s total merchandise exports.

The foundations for Viet Nam’s rapid integration into the global market were laid in 1986 with the introduction of Doi Moi, Viet Nam’s economic renovation programme. At the heart of the reform was a decollectivization process, through which farming families received most of the land. In tandem, farmers were allowed to increase sales to the market and agricultural taxes were reduced. Agriculture also benefited from other fiscal reforms, the creation of a Treasury system, and the reform of the banking system, which created a secure deposit base and allowed fiscal operations deep into the country’s rural areas. These measures had a profound effect on society, encouraging entrepreneurship and willingness to take risk. Finally, Doi Moi offered “return” options to workers in the new factories, thereby reducing risk for internal migrants and further accelerating the fast development of rural areas.

There is no doubt that the success of the 1990s was also promoted by a growing openness in the global trading environment, in which Viet Nam’s export performance benefited from declining tariffs and non-tariff barriers. As in many countries, Viet Nam’s economy also enjoyed all other benefits of globalization, such as cheaper and faster transportation and communications. However, while benefiting from improved market access abroad, Viet Nam was slow in removing its own border protection or its trade-distorting subsidies. Particularly, agricultural import tariffs have been raised repeatedly over the 1990s (see, for example, USDA, 1999c, 1999d and 2001b)⁵ and subsidies have been provided with the aim of increasing agricultural production and exports. Fforde (2002) even maintains that the initial fast liberalization process in the early 1990s did not allow the country to build up enough expertise and competitiveness and put a brake on overall growth.

Policies also played an important role in managing the 2000/02 coffee crisis that severely affected large parts of Viet Nam's thriving agricultural sector. For example, a sizeable support programme was launched to help coffee growers regain international competitiveness. The programme includes subsidies to upgrade coffee quality and to reduce production costs. It promotes smaller, less centralized processing factories and warehouses suitable for the many different coffee-producing regions (USDA, 2001b) and supports the creation of overall and agricultural infrastructure and the shift towards improved coffee varieties. But the new policy package also initiated a rationalization process within Viet Nam’s coffee economy. Changes in eligibility for the existing soft loan programme are probably the most important efforts in this context. Under the revised scheme, credit subsidies will not be offered to low-yield producers or inefficient operations, but only to potentially profitable farmers. In parallel, special preferences have been given to participating farmers to switch to arabica coffee or to improve their operation’s effectiveness (USDA, 2001b).

Overall there are probably three important features that have contributed to the success of the coffee policy. First, policies play an active role in promoting production, particularly production for exports. Second, support is not an open-ended government commitment but is limited to kick-starting the process and helping the sector discover where its comparative advantage lies. And third, once competitiveness is established, policies focus on the competitive producers and decline support to non-competitive ones. In doing so, competitive producers are helped through the price troughs while the non-competitive ones are encouraged to exit from the sector.⁶

A fairly similar set of reforms in China in the late 1970s set the stage for the impressive economic performance that has been the envy of poor countries since. Per capita GDP (at current prices) increased by a factor of nine and the value of exports by a factor of ten. Agricultural output tripled, as did agricultural exports, while the number of undernourished declined by 76 million people (from 1990/92 to 1997/99). In fact, China was the single largest contributor to the reduction of undernourishment during the 1990s, accounting for two-thirds of the progress made in fighting hunger (FAO, 2001a).

This rapid development process started with fairly simple initial reforms in the agricultural sector. The communal farming system was loosened and the so-called household responsibility system was introduced, allowing farmers to sell their crops on the free market once they had fulfilled their quota obligations to the state. The government remained actively involved in agricultural policy formulation and implementation. The overall process can be best described as one of active experimentation, in which production expanded rapidly under administrative pressure to fulfil production quotas, as well as under production incentives through input subsidies (water, fertilizer).⁷ In tandem, policies were put in place that promoted the adaptation of new technologies from abroad to the domestic production environment (particularly the high-yielding varieties of the green revolution) which, over time, even enabled domestic researchers to take the lead in developing new applications (hybrid rice, etc.).⁸ The importance of adopting external knowledge and technologies is discussed in Section 10.2.3 below. Finally, domestic policies also encouraged the exit from agriculture of unproductive farmers. These measures include the creation and promotion of township and village enterprises (TVEs) that helped absorb the excess labour of rural areas or, more recently, massive investments in rural infrastructure to reduce transaction costs and increase competitiveness of farmers and food processors in China’s hinterland.

Unlike Viet Nam and China, sub-Saharan Africa largely failed to take advantage of the growing trade opportunities in global markets. Its share in global exports, for instance, dropped from 3.1 percent in the mid-1950s to 1.2 percent in 1990. This corresponded to an annual loss in export earnings of about US$65 billion. In trying to identify the contributing factors to this decline, a World Bank study (Amjadi, Reinke and Yeats, 1996) found that trade barriers abroad have not had a significant influence. On the contrary, once preferences were taken into account, tariffs conveyed significant competitive advantages over competing goods shipped from some other regions, and were even a positive factor for the location of commodity processing in Africa as opposed to some other foreign locations.⁹ Similarly, non-tariff barriers (NTBs) of markets abroad did not account for Africa's poor export performance. In fact, the share of Africa's exports subject to NTBs (11 percent) is less than half the average for the group of developing countries.

To draw general lessons from a few success stories is difficult. Nonetheless, there are a few commonalities that characterize successful globalizers. To begin with, all of them have both outward-oriented policies and domestic production incentives. Moreover, freer trade regimes are adopted after or in parallel with domestic policy reforms. The country examples also suggest that openness per se is unlikely to be a sufficient condition for a successful integration into the global economy. More important seems to be (i) that farmers can operate in the appropriate domestic incentive system; (ii) that the incentives are reduced where unproductive excess capacity is created and exit policies are in place; and (iii) that adjustment and reallocation costs are minimized, e.g. through appropriate timing, sequencing and pacing of policy measures.

10.2.2 Freer movement of capital and the emergence of transnational companies

Alongside the expansion of trade flows, another feature of globalization has been the rapid growth in international capital flows. Transnational corporations (TNCs) have been the driving force behind this rapid development and foreign direct investment (FDI) is the main instrument through which TNCs expand their reach beyond national boundaries. Through FDI, TNCs affect production levels and composition, production technologies, labour markets and standards, and eventually also trade and consumption patterns. Through their control over resources, access to markets and development of new technologies, TNCs have the potential to integrate countries into global markets.

Foreign direct investment: level, flows, and distribution. Between 1989/94 and 2000, annual global FDI inflows increased more than sixfold, from US$200 billion to US$1 270 billion (UN, 2001c). The growth in FDI exceeded by far the growth in trade flows. Between 1991 and 1995 the average annual growth rate of FDI was 21 percent compared with 9 percent for exports of goods and non-factor services. Between 1996 and 1999, the difference increased, with FDI growing at an average rate of 41 percent and exports growing at 2 percent. In 2000, total sales of foreign affiliates amounted to US$16 trillion, compared with world exports of goods and non-factor services of US$7 trillion. Developed countries absorbed the major part (80 percent) of the FDI inflows but also accounted for a similar proportion of outflows.

As an increasing number of countries integrated into the global economy, FDI flows also became more evenly distributed and reached more countries in a substantial manner (UN, 2001c). By 2000, more than 50 countries (24 of which were developing) had accumulated an inward FDI stock of more than US$10 billion, compared with only 17 countries 15 years earlier (seven of them developing countries). The picture for outward FDI is similar: the number of countries with stocks exceeding US$10 billion rose from ten to 33 (now including 12 developing countries, compared with eight in 1985) over the same period. In terms of flows, the number of countries receiving an annual average of more than US$1 billion rose from 17 (six of which were developing countries) in the mid-1980s to 51 (23 of which were developing countries) at the end of the 1990s. In the case of outflows, 33 countries (11 developing countries) invested more than US$1 billion at the end of the 1990s, compared with 13 countries (only one developing country) in the mid-1980s.

A closer look at the regional distribution, however, reveals that there is still a high concentration of FDI flows within developing Asia (Table 10.1). More than half of all FDI went to Asian economies, and within Asia, East and South Asia accounted for almost the entire inflow. At the other end of the scale, FDI inflows to Africa have remained minimal. While doubling in absolute terms, the continent’s share in total inflows to developing countries fell by half, between 1989-94 and 2000, from 6.8 to 3.4 percent (Table 10.1).

TNCs and FDI in food and agriculture. The basis for the large TNCs that dominate today’s global food economy was laid with the market concentration process in developed countries. In the United States, for instance, four meat-packing firms have traditionally controlled about two-thirds of the beef supply, and by the mid-1990s over 80 percent of the beef supply was controlled by four firms (OECD, 2001d). High levels of firm concentration also characterize the retail food distribution system in other OECD countries. For example, in Australia, over 75 percent of the retail food distribution system is controlled by three firms.

As the domestic markets for their products became increasingly limited, these large food processors extended their operations in two principal directions. First, they extended their reach “vertically” by taking over the principal operations along the food chain. The final result of this process is often a fully vertically integrated company with operations that cover the entire food chain from the “farmgate to the dinner plate”. Second, they expanded horizontally, i.e. they extended their reach by branching into foreign markets. The combined process of horizontal expansion across countries and vertical integration within the company created the typical TNC in food and agriculture. These TNCs are frequently referred to as “food chain complexes” or “food chain clusters”.

The three most advanced food chain clusters are Cargill/Monsanto, ConAgra and Novartis/ADM.¹⁰ ConAgra, for example, one of the three largest flour millers in North America, ranks fourth in corn milling. It produces its own livestock feed and ranks third in cattle feeding, second in slaughtering, third in pork processing and fourth in broiler production. United AgriProducts is part of ConAgra and sells agrochemicals and biotechnology products (seeds) around the world. The conglomerate also owns its own grain trading company (Peavey). At the retail level it widely distributed processed foods through such brands as Armour, Swift and Hunt’s, and is second only to Philip Morris as a leading food processor. The Novartis/ADM cluster also connects the different stages of food production from genes/seeds (Novartis and Land O’lakes) to grain collection (ADM) to processing across the globe from Mexico, the Netherlands, France, China and the United Kingdom. Alliances with IBP, the largest United States beef packer and second largest pork packer, extend its influence down the food chain (Heffernan, 1999).

A more recent feature within the process of vertical integration is that the food chain complexes have extended ownership and control from the agricultural downstream sector (food processing and marketing) into strategic parts of the upstream system. For instance, it is estimated that only three firms control over 80 percent of US maize exports and 65 percent of US soybean exports; only four firms control 60 percent of domestic grain handling and 25 percent of compound feed production (Hendrickson and Heffernan, 2002). While market concentration in certain parts of a country’s food system is a well-established feature in many countries, these complexes have extended their influence across country borders and have created vertically integrated or coordinated production chains across the globe (OECD, 2001d).

Table 10.2 shows the implantation of agrofood TNC subsidiaries from different home regions of the parent company arranged by host region of the subsidiary, i.e. how much and where TNCs have spread out their activities. It shows that most TNCs in the food industry operate from a western European or United States home base. Together they account for about 84 percent of all TNCs that have invested in markets abroad. Those from Asia are largely found in Asia, although there are significant numbers located in the EU and North America, and those from Latin America are predominantly in other Latin American countries. Europe and North America are both the home and the hosts to the vast majority of TNC subsidiaries, their stage of development acting both as push and pull forces. TNCs from the EU and the United States have, to a significant extent, also established foreign affiliates in developing countries. In both cases, Asia and Latin America are the most important destinations. TNCs from western Europe, for instance, have nearly as many foreign affiliates in Asia or Latin America as they have in North America. By contrast, Africa is home to very few subsidiaries, and those it has are almost entirely located within other African countries.

TNCs in food and agriculture: help or hurdle for rural development? The general view among experts – in developed and developing countries alike – is that FDI is a powerful catalyst for overall economic development. A number of recent publications (World Bank, 2001e and UN, 1999b) have documented the benefits that FDI can create for development. The 1999 issue of the World Investment Report (UN, 1999b) identifies five major advantages that are carried along to the host country alongside inflows of FDI: access to capital,¹¹ access to technology, access to markets, enhanced skills and management techniques and help to protect the environment

The UN report stresses that developing countries have vastly benefited from the rapid increase in FDI inflows during the 1990s, particularly through added productivity growth. Several other sources underline and quantify the potential that TNCs have in generating productivity gains (e.g. Sachs and Warner, 1995; Baily and Gersbach, 1995).¹² Baily and Gersbach (1995) stress that the potential for productivity gains is particularly large where TNCs reinvest profits in the host countries, create forward and backward linkages with local firms, upgrade the performance of a country’s firms through the provision of superior expertise and technologies and hence boost growth (Box 10.1). Also to be remembered is that TNCs are the world’s chief repository of economically useful skills and knowledge and that technology flows are increasingly important components of FDI (UN, 1999b).

Despite the vast potential of FDI for rural development, there are a number of reasons to suggest that simply opening up a country’s border to FDI may not be the best way to reap the benefits. There are substantial differences in the “quality” of FDI flows and governments may have to intervene in the process of channelling FDI. Furthermore, the complexity of the FDI package means that governments face trade-offs between different benefits and objectives. For instance, they may have to choose between investments that offer short- as opposed to long-term benefits; the former may lead to static gains, but not necessarily to dynamic ones. Moreover, the level of FDI inflows to developing countries can easily be overstated. TNCs can repatriate much of the profits that they produce from their investments in developing countries. In sub-Saharan Africa, for instance, an average of 75 percent of the profits have been repatriated annually between 1991 and 1997 (IMF, 1999). Also the costs of attracting FDI through tax revenues foregone in the host country can be substantial¹³– costs that need to be counted against the benefits these inflows bring.

There are also concerns that TNCs abuse their market power, add downward pressure on rural wages and disempower farmers through unfair contractual arrangements. These concerns often arise from the notion that the linkages between farmers and TNCs are based on contracts between unequal parties, one party consisting of a mass of unorganized small-scale farmers with little bargaining power and few of the resources needed to raise productivity and compete commercially, and the other party being a powerful agribusiness, offering production and supply contracts which – in exchange for inputs and technical advice – allow it to exploit cheap labour and transfer most risks to the primary producers. This imbalance in negotiating power has been described extensively for the international cocoa and coffee markets where smallholder farmers are at the starting-point of “buyer-driven supply chains” (e.g. Ponte, 2001; see also Box 10.2). Such an imbalance in negotiating power can affect the distribution of benefits along the food chain (Talbot, 1997; see also Ponte, 2001; Gibbon, 2000; and Gereffi, 1994). For example, the share of income retained by coffee producers dropped from 20 percent in the 1970s to 13 percent in the 1990s and is likely to have dropped further with the dramatic price decline for green coffee in 2001/02.

But it should also be noted that there have been important domestic factors that have squeezed the profit margins for producers. Some developing countries have creamed off farmers’ profits through export taxes, export controls and mandatory sales. For instance, for much of the 1970s and early 1980s cocoa farmers in Ghana were obliged to sell their crop to the government for as little as a twentieth of the world price (The Economist, 2002a, p. 44). Likewise, profit margins have also been squeezed for Ecuador’s banana growers, largely in the absence of TNC activities. Ecuador’s government has currently fixed the local price for bananas at US$2.90 per box, whereas the export price is as high as US$17 per box. The low farmgate price “has squeezed farmers’ profits to almost nothing” (The Economist, 2002b, p. 54). Unlike Central America, where TNCs own almost all banana plantations, Ecuador’s banana economy is dominated by some 6 000 small family farm producers.

Some experience with successful FDI in food and agriculture. The links created between TNCs and domestic firms are crucial factors that determine whether and to what extent a host country benefits from FDI. In the food industry, these linkages are forged between the TNC and the farmers or the local procurement company. The potential for linkage-intensive FDI is particularly substantial in food and agriculture. Linkage-intensive FDI is often the result of the need to process perishable inputs such as milk or fruit and vegetables (UN, 2001c). It can also be forced by logistical bottlenecks or by tariff barriers that make imported goods less competitive. Moreover, TNCs may face restrictions on landownership in many developing countries which can make it necessary for foreign affiliates to rely on domestic producers and to engage in efforts to develop new and upgrade existing suppliers.

These linkages from the foreign affiliate to the national farm sector can provide enormous benefits for farmers and their cooperatives and thus have considerable potential to stimulate rural development. Field research conducted in India (UN, 2001c) provides a number of interesting insights as to how these benefits are generated. It reveals that the four leading TNCs (i.e. Pepsi Foods Ltd, GlaxoSmithKline Beecham Ltd, Nestlé India Ltd and Cadbury India Ltd) on average sourced locally 93 percent of their raw material (tomatoes, potatoes, basmati rice, groundnuts, cocoa, fresh milk, sugar, wheat flour, etc.) and 74 percent of other inputs (such as plastic crates, glass bottles, refrigerators, ice chests, corrugated boxes, craft paper, etc.). Through these linkages the TNCs promoted overall development by means of the following methods.

• Collaboration in product development. All four TNCs are engaged in product development with local research institutes or universities, to develop hybrid varieties of crops and vegetables and new agricultural implements, to alter cropping patterns and to raise productivity. For example, Pepsi Foods has evaluated more than 215 varieties/hybrids of chili, probably the largest scientific evaluation of chilies anywhere. Pepsi’s technology in chili cultivation has raised its yield three times. In addition, Pepsi has developed 15 new agricultural implements to facilitate planting and harvesting in India.
• Technology transfer and training. New hybrid varieties, implements and practices have been transferred to suppliers (primarily farmers) through farmer training camps. Pepsi provides its contract farmers, free of charge, with various agricultural implements and hybrid seeds/ plantlets, as well as process expertise. Cadbury India has a procurement and extension services team that imparts training to potential and existing suppliers in new techniques in planting, harvesting, quality control and post-transplantation care of cocoa crops through technical bulletins, video demonstrations, slides and charts and live demonstrations on the use of various agricultural implements.
• Introduction of contract farming. Farmers are contracted to plant the processors’ crops on their lands and to deliver to the processors, at pre-agreed prices and quantities of output based upon anticipated yields and contracted area. Towards this end, a processor usually provides the farmers with selected inputs such as seeds/seedlings, information on agricultural practices, regular inspection of the crop and advisory services on crops. Farmers have the choice to leave some part of the output free from the contract arrangement to sell on the open market (see also Box 10.3).
• Financial assistance is provided to growers through the involvement of agricultural development banks. For example, GlaxoSmithKlineBeecham acts as a guarantor, enabling its suppliers to take bank loans.

Technology transfer to local farmers has had a positive impact on farm productivity. Tomato yields of local suppliers for Pepsi in Punjab, for example, rose from 16 tonnes/ha in 1989 to 52 tonnes/ha by 1999. In general, foreign affiliates may have contributed to better farming practices (e.g. hybrid seeds, transportation innovation) resulting in increased incomes and yields (McKinsey &Company, 1997).

10.2.3 International flows of knowledge and technological innovations

Probably the single most important transfer of external technology to developing countries’ agriculture took place during the green revolution. The literature documents where the new technologies have been adopted, to what extent, and how swiftly this has been the case. This section will focus on why some countries managed to adopt, exploit and further enhance the new technologies, while others failed to do so. It will try to identify the policies that allowed some countries to embrace global technological innovations, but also describe why other countries are still struggling to adopt the technologies that developed country farmers have been using for many decades.

One of the most influential studies in this context (Griliches, 1957) underlines the importance of inventive adaptation. Griliches shows that farmers in Iowa and Illinois had long adopted high-yielding hybrid maize varieties suited to the Corn Belt states, while farmers outside the Corn Belt (e.g. in Alabama) continued to grow inferior traditional varieties. This had little to do with the farmers’ capabilities. Instead, differences in the agro-ecological conditions between the Corn Belt and Alabama, together with the sensitivity of hybrid maize to these differences, resulted in the lack of adoption and the continuous technological distance between these maize-growing areas. As Griliches noted, “farmers outside the Corn Belt could not reap the benefits of the new technologies until the adaptive research had taken place to make the technologies available to the new environment”.

In general, the same holds for the transfer of new technologies to developing countries. Farmers in the Philippines got no direct benefit from many decades of United States hybrid maize research that produced a tripling of United States maize yields. They indirectly benefited from previous hybrid research in the United States only after the research capacity was created to adapt the hybrid varieties to local conditions in the Philippines. In many African countries, farmers are still cut off from the benefits of hybrid maize varieties, not because they are unwilling to import the technology but simply because the technology has not been adapted to their local growing environments.

Perhaps even more important, much of the success of the green revolution was not or not primarily based on the fact that new technologies were made available to countries from outside. While the new “foreign” technologies, i.e. high-yielding varieties, played an important role, there is ample evidence that the superiority of these new varieties was largely limited to the areas to which these new technologies were adapted. Evenson and Westphal (1994) documented how important the adaptation process to tropical environments was for the success of high-yielding rice varieties outside their subtropical homes.¹⁴ “It was in the 1950s, after an Indica-Japonica crossing programme sponsored by the FAO and IRRI gave major impetus to rice improvement for tropical conditions, that the new technologies became available where they were needed. By 1965, many national rice breeding programs had been established in tropical conditions. India, for example had 23 programs in various locations. Around 200 rice breeding programs existed in some 40 countries by 1970. Most had, and have maintained, a close association with IRRI, which has served as a nodal point in the transfer of new germplasm.”

Evenson and Gollin (1994) quantified the importance of adaptive research in the spread of high-yielding rice varieties during the green revolution. They show that national research centres played a crucial role in the adoption and spread of the new “technology”. The International Rice Research Institute (IRRI), as the central and exogenous provider of the new technology, accounted for only 17 percent of all new varietal releases since 1965. IRRI played, however, a crucial role in generating the basic technology: it accounted for 65 percent of all new releases of parental varieties.

In the future, the very same factors will likely determine the extent to which the new agrobiotechnologies will be adapted and diffused to the economic and agro-ecological environments of developing countries, even though the issue is complicated by the fact that many of the new technologies are proprietary ones. Countries that put in place the basic infrastructure that promotes the adaptation to local environments are likely to gain the most. Again, Asian countries are likely to come first, followed by Latin America, while there is a danger that African countries will, once again, be left behind.

The factors that determine the success in reaping the benefits of new technologies have much in common with those that enable countries to reap the benefits of open markets. The experience of the green revolution suggests that the existence of new productivity- enhancing technologies alone is not a guarantor for a successful adaptation of these technologies. Likewise, opening up to international markets and reduction of border measures will not, on their own, ensure that the potential of freer trade can be fully exploited. Both openness to trade and to technological change are important, but what seem to be more important are the policies and institutions that allow countries to exploit the opportunities offered by openness. These factors can help to acquire the often tacit knowledge that enables countries to adapt new technologies to the domestic market environment, help them to exploit the demand potential of large international markets and employ trading rules to their advantage. Taken alone, access to markets is unlikely to create an exportable surplus. If not locally adapted, new technologies will not substantially increase productivity.

continued

¹ Between 1850 and 1913, global overseas transportation capacity increased by more than 500 percent. At the same time, tankers and vessels with cooling facilities vastly expanded the range of products exchanged within and across countries and continents.
² Dollar and Kraay acknowledge this possibility, when declaring that “we use decade-over-decade changes in the volume of trade as an imperfect proxy for changes in trade policy” (Dollar and Kraay, 2001).
³ Bussolo and Lecomte (1999) also stress that trade policy theory does not unambiguously suggest that protection has a negative impact on growth in developing countries. However, they emphasize that those countries that apply more open trade regimes, together with fiscal discipline and good governance, have enjoyed higher growth rates than those implementing restrictive policies. An open and simple trade policy can foster some external discipline, helping to reduce distortions on domestic markets, and to narrow the scope for wrong or unbalanced policies in other areas, as well as for rent-seeking and corruption that do not normally favour the poor.
⁴ For much of the 1970s and 1980s, developing countries’ agriculture was heavily discriminated against (see Chapter 9). Wherever and as long as agriculture was taxed, either directly or through macroeconomic measures, development slowed and international integration suffered.
⁵ Viet Nam undertook, for instance, a far-reaching tariffication exercise in 1999 (effective December 1999), converting many non-tariff barriers into tariffs, in line with World Bank prescriptions. This process was in general accompanied by an increase in effective border protection, with tariff rates between 30 and 100 percent. Detailed tariff schedules are, for instance, available from USDA (1999c, 1999d).
⁶ Viet Nam’s active policy engagement in promoting and disciplining production may also be regarded as a special case of policies that have been pursued elsewhere in East Asia. “Where Korea differs from other developing countries in promoting big business, was the discipline the state exercised over these chaebols by penalizing poor performance and rewarding only good ones … The government as the controller of commercial banks was in a powerful position to punish poorly managed firms by freezing bank credit. As a result only three of the largest 10 chaebols in 1965 – Samsung, Lucky-Goldstar and Ssangyong – remained on the same list 10 years later. Similarly, seven of the largest 10 in 1975 remained on the same list in 1985” (Kim, in Nelson, 2000). The Korean Government was quick to shelve its plans for supporting particular firms or industries when new information suggested that productivity would lag (Westphal, 1981, p. 34).
⁷ It should be noted that the system of incentives to increase or slow output, and even to leave or stay in agriculture, was accompanied by a rigid system of administrative measures that may not be at the disposal of policy-makers in market economies.
⁸ Agricultural policies were accompanied by non-agricultural policy measures that aimed to facilitate structural change and gradually to liberalize the non-agricultural sector. The most important measures were the creation of township and village enterprises (TVEs), the extension of the “market track” into the urban and industrial sectors, and the creation of special economic zones to attract foreign investment.
⁹ The authors warn that Africa may experience some losses through the Uruguay Round erosion of these preferences, although such losses should not be large.
¹⁰ All of them are located in, and operate globally from, the United States. They control, through joint ventures and strategic alliances, important parts of the food industry that range from seeds to processed products such as meats, seafood and other foods (OECD, 2001d).
¹¹ The catalyst for the East Asian financial crisis in 1996 was a huge outflow of funds, as commercial banks and institutional investors called in loans. The resulting losses were equivalent to more than 10 percent of GDP for some countries (based on data in IMF, 1999). By contrast, FDI remained constant throughout this period.
¹² This is partly because of increased competition, partly a demonstration effect “…when companies based in one country set up operations in another, they carry with them the production processes and productivity levels of their home country” (Baily and Gersbach, 1995, p. 309).
¹³ For example, in the second half of the 1990s, the governments of Rio Grande do Sul and Bahia in Brazil gave General Motors and Ford financial packages worth US$3 billion to locate factories in their states (Hanson, 2001).
¹⁴ Evenson and Westphal also provide an extensive documentation of the events that kick-started the spread of high-yielding rice varieties in the 1950s. Inter alia, they explain that: “The earliest rice improvement research activities were in Japan, where major gains were made in this century through improving Japonica landraces suited to subtropical regions. It was not until World War II that concerted efforts were made to improve the Indica landraces. As of that time, rice producers in Japan, Korea, Taiwan and parts of mainland China had achieved a 50-year technological lead over the tropical rice producing areas”.