Chapter 6. Current debates on trade policy and agricultural development: an overview

6.1 Introduction

The objective of this chapter is to draw out the key issues developed in Chapters 7 to 10, whilst placing them in the context of the wider contemporary debates related to economic and trade reform.

Running through many of the debates, and an issue that has been brought to prominence recently by a number of the leading international NGOs, is the visible imbalance between both the level of agricultural protectionism in developed as opposed to developing countries, and the process of agricultural market and trade liberalization undertaken by many developing countries, and that committed to, but often not undertaken by, developed countries. A key emerging message is that this imbalance needs to be given greater attention in the analysis of the effects of both unilateral reform programmes, and the commitments to reform enshrined in the WTO Agreement on Agriculture. Section 6.2 provides an overview of the drivers of globalization (notably, reduced trade barriers and cost reduction), and sets these in the context of the differential levels of support and protection provided to OECD and developing country producers.

Section 6.3 examines the potential benefits of reforms that are aimed at increasing sectoral efficiency, by explaining the central role that agriculture can play in the wider economic development of the majority of developing countries, a role that goes far beyond simply expanding the quantity of food that is available to the food insecure, and which differs significantly from the role that it plays in developed countries. The section starts from the premise that there is significant disagreement, based to a large degree on the observed failings of agriculture sector interventions, on the extent to which the sector can contribute, and therefore on the level of investment, and on the form of policy change required, if it is to contribute effectively. This leads to an examination of instances where the orthodox policy analyses and prescriptions may have been lacking in terms of their understanding of differential impacts on different sets of producers both between and within countries. These failings can include a lack of recognition, on the one hand, of the importance of the imbalance, not just in terms of levels of protection, but in the extent of supportive institutions across OECD and developing countries; and, on the other, of the vulnerability that changes to both global and domestic market structures, facilitated by reform, are imposing on the different groups within different societies.

The remainder of the chapter then focuses on two of the key drivers of globalization, namely reduced trade barriers and cost reducing advances in technology, in terms of the implications for resource poor producers. In considering the implications of unilateral reform, Section 6.4 provides a detailed critique of some aspects of the orthodox consensus, with particular focus on the form and role of institutions for supporting participation by poorer groups in the benefits of wider efficiency gains within the sector. It is argued that the current prescriptions are not providing for the development of some essential supporting institutions in the agriculture sector and that this in turn, is holding back vital productivity improvements and preventing the full contribution of the sector to economic growth, poverty reduction and improved food security.

Section 6.5 examines the scope for promoting developing country agriculture’s role within the framework of multilateral trade agreements, discussing calls for changes to the framework that would allow some of the constraints that have been imposed in the context of past unilateral reforms, and of the contemporary global market situation, to be alleviated.

Finally, Section 6.6 considers the potential impact of changes in market structure, many of which have been driven by cost reduction resulting from technological advance, and which have been facilitated by reductions in barriers to trade. A set of new threats and opportunities that are emerging as a result of changes in market structure, some of which are being driven by recent trends towards capital market liberalization, are used to illustrate the potential impact of such changes. It is argued that these, often radical, changes have not as yet been incorporated in mainstream policy analysis and prescription, despite the fact that they can have overwhelming impacts on the ability of agriculture to contribute to the alleviation of poverty and food insecurity.

6.2 Imbalanced levels of agricultural protection

Globalization can be defined as the integration of markets (capital and finance, input and output) culminating in rapid increases in both the absolute level, and the proportion of, goods traded; and which is facilitated by both rapid advances in technologies which contribute to reductions in transport, information and transaction costs, and by the efforts of governments to reduce barriers to trade.

However, as Mellor explains in Chapter 7, there is an implication of frictionless movement and perfect knowledge that understates the requirements for benefiting from globalization. Globalization immediately transmits lower prices to producers who may not have participated in cost reduction, and who will experience a decline in income, and in some cases, eventually revert to minimum subsistence agriculture.

Concurrent to the cost reducing advances in technology, governments have worked to reduce barriers to increased trade flows. Although it is the failure of the WTO AoA to deliver the proposed benefits that has provoked criticism by the international NGOs, the imbalance in agricultural sector reforms^[74], runs deeper than those associated with the multilateral trade-related reforms. Reforms take place in the context of multilateral, plurilateral, for example Regional Free Trade Agreements (RTAs), and unilateral processes. As an example of the latter, structural adjustment programmes implemented over the past few decades have resulted in radical reform of the agricultural sectors of many developing countries, a period during which the majority of OECD agricultural sectors have continued to be heavily protected. Whilst it is generally acknowledged that unilateral reforms were often required, it has also been contended that the process adopted has, in many cases, severely damaged the capacity of developing countries to increase levels of agricultural production and/or productivity. These unilateral reforms tend to have been reinforced by multilateral agreements.

Unilateral trade liberalization has been undertaken in developing countries under pressure from international finance institutions as part of structural adjustment and stabilization programmes. By contrast, agricultural trade has only recently been impacted by multilateral agreements (for example, the AoA). WTO rules constrain the extent to which countries can protect themselves from increased competition. This has resulted in a number of NGOs, Oxfam and CAFOD for example, suggesting that the more negative aspects of unilateral liberalization in developing countries have been compounded by double standards in commitments to multilateral agreements, and maintaining that the “you liberalize, we subsidize” attitude is extremely damaging.

Between unilateral and multilateral reforms are RTAs, which as well as having a longer history than multilateral agreements, notable examples being the European Union and the North American Free Trade Agreement (NAFTA), are growing in number. WTO acknowledges that RTAs differ considerably in scope: “in their simplest form, they provide for the exchange of preferences on a limited range of products between two or more parties... At the other extreme, they may both liberalize ‘substantially all’ trade and contain trade disciplines which stretch well beyond traditional tariff elimination to areas such as standards, services, intellectual property and competition.”^[75] The WTO identifies 240 RTAs, of which 70 percent were in force as of July 2000. The remaining 30 percent are defined as being under negotiation, but likely to become fully-fledged RTAs by 2005. It is likely therefore that RTAs will become increasingly important in defining the conditions of trade between nations.

Whilst acknowledging the growing role of RTAs, this chapter focuses on unilateral and multilateral liberalization as well as the importance of the state of support and protection across developed and developing countries before the relevant episodes of reform were initiated.

The impact of the structural adjustment episodes of the 1980s on relative levels of protection

Generally, OECD agriculture has been, and continues to be, characterized by high levels of agricultural protectionism. In real terms, transfers to the agriculture sectors in OECD economies have fallen from 2.3 percent of total OECD GDP in 1986-88 to 1.3 percent in 2001^[76]. Nevertheless, the transfer is still about one third of total OECD farm receipts and approximately six times the total overseas development assistance provided by OECD countries to the developing world (about $US 50-60 billion per annum and fairly static). The World Bank has calculated that whilst the real level of aggregate support has fallen, so have both the farm value added and the number of farmers, resulting in a marginal decrease in support as a percentage of agricultural value added. Indeed, support per active farmer has actually increased by 25 percent and 50 percent in the United States and EU respectively since the late 1980s^[77].

By contrast to the OECD countries, there has been substantial reform in the agricultural policy of many developing countries over the past few decades. The 1960s and 1970s were periods of anti-agricultural bias in many developing countries. A dramatic illustration of the conditions under which developing country producers operated, pre-structural adjustment, is provided in Table 6-1.

Table 6.1 Direct, indirect and total nominal protection rates by region 1960-1984 (percent)

¹ Republic of Korea, Malaysia, Pakistan, Philippines, Sri Lanka and Thailand.

² Argentina, Brazil, Chile, Colombia, Dominican Republic.

³ Mediterranean: Egypt, Morocco, Portugal, Turkey.

⁴ Côte d’Ivoire, Ghana, Zambia.

Source: Table 1-2, p. 11, Krueger, A., Schiff, M. & Valdés, A.. 1991. The Political Economy of Agricultural Pricing Policy. Volume 1. A World Bank Comparative Study. Johns Hopkins Press, Baltimore.

Although direct intervention on importables was positive, direct taxation of exportables dominated the protection of importables, and the net impact on the aggregate of all selected products was negative in all regions. Further, the negative impact of indirect protection (e.g. overvaluation of the exchange rate, industrial protection etc) was greater than direct taxation in all regions. Total net taxation of agriculture was greater than 25 percent of the value of production in all regions, and exceeded 50 percent in the SSA countries.

The unilateral reforms implemented during the 1980s and 1990s reduced this quantifiable anti-agricultural bias in domestic policy, particularly that associated with indirect taxation. Given fiscal constraints on the use of subsidies, trade policy is now the primary tool used to protect agriculture in developing countries. Nevertheless, partly as a result of the adjustment programmes, protection in developing countries has decreased, with the halving of average tariff rates and a reduction in the variation in their levels^[78]. Whilst the average tariff in developing countries for all manufactured and agricultural tariff lines is 14 percent (17.9 percent in LDCs) compared to 5.2 percent in industrialized countries^[79], the dispersion in the developing country region is less dramatic. On average the highest tariffs in developing countries are about 12 times the average level, compared to about 40 times higher in the OECD. These peaks invariably hit agricultural exports from developing countries.

However, the opening of markets in developing countries, in the context of a global agriculture still characterized by high levels of protection in developed countries, left the reforming developing countries less able to prevent (a) the flooding of their domestic market (import surges) with products sold on the world market at less than their cost of production; and (b) the displacement of local trading capacity which was intended to, and in some circumstances initially did, fill the void left following the deregulation of local markets and associated dismantling of parastatals.

On point (a), the Washington institutions promoting structural adjustment did not take into account the existing imbalance in designing and proposing the reforms and therefore did not predict the resulting disincentive effects on local production in some regions. On point (b) rather than the emergence of sustained local private sector involvement, internal markets have often been overwhelmed by larger companies dominant in global value chains.

The relevance of the imbalance in the context of the AoA

The impact of the unilateral reforms preceding the first multilateral negotiations on agricultural trade (negotiations that essentially excluded developing countries) was to leave developing countries potentially more vulnerable to greater openness, and to impose further constraints on policy intervention aimed at promoting agricultural growth.

Predictions made at the time that the AoA was signed in 1994, that “a reduction in price distorting subsidies would boost global agricultural trade, stabilize global commodity prices and benefit developing countries”^[80] have not materialised. Indeed, many commentators, particularly among the international NGO community, suggest that developing countries far from benefiting, have suffered damage to their agricultural production capacity related to import surges following the reduction or elimination of tariffs, and to the intense competition to domestic production resulting from subsidization of exports and from dumping practices^[81].

These commentators do not however, use these facts to argue against the benefits of increased trade in agricultural commodities. Rather, they are concerned that the mechanisms by which increased trade is being pursued are fundamentally flawed and strongly biased against the interests of developing countries. This concern is dramatically reflected in a recent statement by Oxfam^[82] that “international trade is a game governed by rules which are constructed to ensure that they (developing countries) cannot win” and that “rich countries combine protectionism at home with aggressive pursuit of markets overseas to the extent of using the WTO to prise open overseas markets”.

Multilateral reforms, if followed through to complete liberalization, should in theory begin to redress the current imbalance in levels of protection. However, even if OECD agricultural policy were to be radically reformed, there would still be an imbalance in terms of the ability of developing country agriculture to compete, particularly those countries whose sectors are dominated by many resource-poor low-income producers who do not have access to the institutional support (for example mechanisms to offset risk, the research, development and extension capacity, and market information systems) that is widely available to producers in the OECD.

The imbalance that has been manifested in multilateral reform processes, notably the WTO, is reviewed as a series of specific issues in a critique by Green and Priyadarshi^[83]:

• design and application inequities favouring developed countries;

• failure to recognize fundamental differences between the roles of agriculture in developed and developing countries;

• failure to address food production requirements in developing countries;

• no commitment to food security;

• lack of flexibility to correct anomalies in tariff structures especially with respect to food security crops;

• insufficient recognition of the impact of import surges;

• ineffective implementation of the Marrakesh Decision^[84].

The importance of the imbalance in agricultural protectionism

The current visible imbalance in levels of protection has been used by some to argue for a rectification of the imbalance before poorer countries commit to further reductions in their levels of protection. Some commentators however, question the emphasis given to providing this “fairer playing field”. Finger^[85] for example, suggests that “perhaps the least development-friendly side of the Doha Declaration is its willingness to ladle out ‘special and differential treatment’ without a perception of where developing country members would be better off if they themselves observed the disciplines the negotiations aim to establish”. Similarly, Stern^[86] makes the point that trade reform is a key component of an improved investment climate, stressing that “developing countries have much to gain via unilateral liberalization and do not have to wait for the completion of the current negotiations.”

From this standpoint, the current international NGO focus on reducing levels of protectionism in developed country agriculture could be argued to be taking attention away from efforts to alleviate constraints to responsiveness within developing countries. While less distorted world agricultural markets are certainly a precondition for improving the incentives required to stimulate developing country agriculture, they are by no means a sufficient condition.

However, it is not clear that protectionism, and more specifically, the use of domestic support, should incur a negative connotation in all cases. The fact that the terms of trade move against the agriculture sector as economies develop and become more diversified has been used as an argument for supporting the agriculture sector even as it declines in relative importance. Indeed, as countries become less fiscally constrained, there is a tendency for them to support their agriculture sectors, as evidenced in two of the poorer OECD countries, Mexico and Turkey, which have both increased levels of support recently.

Even if these arguments are negated to some extent by calls for less distorting redistributive policies towards the sector, there may still be strong arguments for the use of subsidies in the early stages of agricultural transformation. As Kydd argues in Chapter 8 of this volume, there may be phases of agricultural transformation during which the returns to the subsidization of input and/or output markets are high following the kick starting of agricultural growth. However, whilst such state intervention has been credited as having supported the Green Revolution in India, for example, as such countries continue to grow, these forms of supportive policy can become locked in. This can put a strain on budgetary resources and prevent their allocation to more efficient uses. There is, therefore, a need to consider, before subsidies are first initiated, how they would be phased out when the returns to their use diminish.

In attacking OECD protectionism, interest groups need to ensure that the types of policy instruments they want to see dismantled remain flexible. One way may be to target support reduction on commodities other than basic foods, for example cotton. The consequence would be that whilst higher world cotton prices would be beneficial for poor producers, higher world prices of basic food commodities could harm net consumers^[87].

Equally, in determining whether it is advisable for developing countries to resist opening their markets further to agricultural imports, two factors appear central: first, the extent to which unbalanced liberalization during the past few decades has mitigated the potential and expected benefits of unilateral liberalization; and second, even if trade barriers in rich countries are reduced by multilateral liberalization, whether this will actually result in an increase in the market share of poorer developing countries, given that they generally lack the infrastructure, skills and capability, and the institutional support, to take advantage of increased openness.

6.3 The role of agriculture in reducing food insecurity

The role of the agriculture sector in reducing levels of food insecurity goes far beyond simply increasing the amount of available food. It is therefore important to understand how agriculture can make its contribution, so often suppressed in the past, before considering the types of opportunities for appropriate intervention, and the threats that the sector may face following further liberalization in the context of the increasing force of globalization.

An emerging consensus view is that in many rural economies, agriculture has greater potential than other activities to stimulate initial growth and improvements in income^[88]. Mellor argues that “there has been a tendency to generalise that economic growth reduces poverty, when in fact it is the direct and indirect effects of the agricultural growth that account for virtually all the poverty decline”^[89]. (In Chapter 14 of this volume, this statement is challenged by Valdés and Foster who argue that in Latin America, with its less rural economies, this is not necessarily the case.) Increases in agricultural productivity have the potential to increase incomes as rural households specialize and intensify production. The 2001 FAO State of Food Insecurity report suggests that weak rates of growth in agricultural production can be related to deteriorations in food security indicators, and that in countries where the number of undernourished increased significantly, the average agricultural growth rate was 0.4 percent per annum between 1990-92 and 1997-99. This compared with countries where the number undernourished decreased significantly, but which achieved an average agricultural growth rate of 3.4 percent per annum. Empirical evidence from the sectoral productivity literature also supports the view that agricultural growth promotes poverty reduction^[90].

The key issue is therefore not whether, but how changes in real income from increased agricultural production translate into improved food security. This is considered by turning to the literature on sectoral growth linkages.

Agriculture sector linkages

Four main categories of linkages have been identified:

• direct impacts on upstream production of, for example, fertilizer, pesticides, packaging materials etc;

• direct downstream production gains, for example in food processing;

• savings and investment linkages;

• indirect consumption linkages occurring via increased employment and income as a result of increased agricultural activity.

Delgado et al.^[91] used SAM/CGE and-semi input output models to investigate the relative contributions of these linkages to the overall multiplier effect of increased agricultural production, finding that the multiplier is most significant where any incremental income generated is spent on labour-intensive, locally produced non-tradable goods and services, (for example, where basic food is the main consumer expenditure item) and where production in the commodity generating the increase in income is labour-intensive. Hazell and Haggblade^[92] calculated that on average in India, for each 100 rupee increase in agricultural income, an additional 64 rupees are added to the local economy. The incremental income in high productivity areas was Rs. 93, whilst in low productivity areas it was Rs. 46. In all cases they found that the greater proportion of the overall multiplier was attributable to consumption linkages rather than to inter-industry production. In similar studies, the relative importance of consumption linkages is also demonstrated.

Whilst there is less evidence that direct upstream and downstream linkages are significant sources of incremental income, savings and investment linkages are important, as increased income can result in increased investment and in reduced production risk and vulnerability. This in turn contributes to increases in productivity and enhanced supply response. However, there may be leakage from the local economy if rates of local savings and investment are too low or if the local economy is strongly linked to the wider economy, such that local opportunities are already available to outside capital, or outside opportunities are already available to local capital, suppressing the multiplier effect.

Indirect consumption linkages have potentially the strongest impact. However, the nature and scale of effects on income and expenditure will depend on the characteristics of the commodity that is subject to the initial price or productivity change, including both local demand characteristics (such as tradability and average budget share of households) and local production characteristics (such as supply elasticity and demand for labour and/or tradable inputs). There is, therefore, a requirement to determine whether any increased income is due to price or to productivity improvements. Higher prices will increase producer income but may have negative effects on consumers (this may include any local processing industry). This compares with productivity improvements, which increase producer income, but do not necessarily increase prices for consumers. Lower prices for tradables will reduce levels of income for net producers of these, but could also suppress any positive consumption linkages via wage income reductions.^[93]

The extent of any gains achieved via consumption linkages will again be limited by leakages. If increased incomes are used to buy tradables, this will reduce the stimulus to local demand. Even with a positive stimulus, if local producers of non-tradable foods cannot respond (e.g. limited labour and/or capital markets or poor food market development) then there will be inflationary pressure on prices which will offset real income increase.

The distinction between expenditure on tradables as opposed to non-tradables is therefore important^[94]. Shifts in production between tradables and non-tradables as a result of changing incentives therefore need to be investigated in terms of their food security implications.

Jaramillo,^[95] examining the impact of reforms in Colombia in the early 1990s, demonstrated that living standards improved in rural areas despite reduced overall agricultural performance following the reforms. He concluded that this was due to growth in employment opportunities driven by increased production of non-tradable crops and growth in the rural service sector. Pre-reform, the sector was characterized by the protection of importables, whilst exportables benefited from export subsidies and subsidized credit programmes, but non-tradable production was generally ignored. The reforms of the 1990s were expected to favour agriculture, but tariff reductions resulted in reduced areas planted to import-competing annual crops, and therefore reduced production of these, but they increased production of non-tradable crops. Although Jaramillo also discusses the fact that expansion in labour-intensive crops drew in landless labour (with decreased employment in tradables compensated for by increased employment in non-tradables), an aspect not explored was whether the increase in the production of non-tradable crops resulted in decreased local market prices and whether this in turn increased real incomes and purchasing power.

Sources of agricultural growth

The source of agricultural growth is therefore particularly important in understanding the extent to which agriculture can be expected to contribute to wider economic growth in an economy. On the basis of past studies and a review of countries that have experienced relatively high rates of agricultural growth during the past three decades, Dorward and Morrison^[96] distinguish three categories of countries: extensive exporters, intensive exporters and those relying on semi-tradable, cereal-based intensification. The first two categories, which have generally been considered to offer the greatest scope for agriculture-led growth, are distinguished by the manner in which they have expanded the production of exportable products (generally non-food commodities): this has been either through land expansion with the associated maintenance, or even reduction of, average yields; or through intensification to increase yields on existing cropped areas. The authors suggest, however, that many countries in the early stages of agricultural transformation will need to follow the third strategy of cereal-based intensification if the multiplier effects explained above are to be significant enough to stimulate wider growth.

Several other findings could be used to support this proposition. In most African countries, cereals are the staple food and provide the basis of the livelihood of large numbers of small farmers. Increasing the effectiveness of cereal marketing systems is likely to be vital to food security of these households^[97]. Other research^[98] argues that cereal-based intensification is an increasingly important strategy in the face of declining tropical export commodity prices (and the terms of trade facing producers of these commodities). A decreasing, but not insignificant, number of poor countries are highly dependent on a single commodity without being the major supplier (e.g. coffee in Uganda, tobacco in Malawi) and it is difficult for these countries to increase their export revenues. Economies that are becoming more marginalized generally have a narrow export base and are therefore prone to terms of trade shocks^[99]. In 1980, manufactured goods comprised 25 percent of exports from developing countries as a group. By 1998, this figure had risen to 80 percent^[100]. Martin suggests that such changes in the composition of developing country exports are “related in part to the relatively high rate of accumulation of human and physical capital in developing countries”. He also argues that “while increases in capital appear to be much less important than technological change as a source of aggregate growth, trade theory suggests that rapid growth in these factors should increase the importance of those sectors that use them intensively”. In countries that have not benefited from trade-led growth, primary commodities still tend to dominate.

How will further liberalization impact upon the relative incentives for production in terms of crop mix; on the relative roles of area expansion and intensification in any increased output and therefore on food security? Changes in cropping patterns as a result of reforms have generated extensive debate. For example, on the question of whether an increase in the production of tradable non-food cash crops is beneficial for food security, it is suggested that this is undesirable at the national level because it implies large-scale, capital-intensive production^[101]. However, whilst the commercialization of such plantation type export crops does not usually enhance food security, especially if it is not associated with increased food imports or increased productivity in food production, the outcome will depend on the technology used and whether the structure of production is dominated by large-scale or small-scale producers. For example, in Bangladesh the production of jute, a key export crop, is more labour-intensive than rice production. Additionally, countries that have seen increases in the growth rates of basic food production have also had positive growth in the production of non-food cash crops, and vice versa.

Recent research provides some convincing evidence from a range of African countries that commercialization of production, especially into export commodities, can increase both cash incomes and the productivity of food crops, both of which contribute positively to food security^[102]. An interesting agenda for research that follows from this finding is to determine the conditions that promote commercialization among smallholders. This research suggests that with appropriate policies cash crop production can offer a route to equitable growth^[103]. At the national level, such increases in production levels are, however, not necessarily distinguishable. Lamb^[104] provides a useful illustration of the extent of substitutability between food and non-food export crops. He finds that there is substitution in production in the short run, with total agricultural output responding negatively to increased export prices and positively to increased food prices, and suggests that this result is consistent with diversion of resources into perennial cash crops, resulting in short-run reductions in food crops with any increase in the production of export crops taking longer to come through.

The preceding text has established that there are a range of avenues by which improvements in agricultural productivity can contribute to economic growth and improved food security. In the following sections, potential constraints, particularly to smallholder agriculture, that may result either from inappropriate policy advice or from recent changes in global food systems are discussed.

6.4 Unilateral reform: The Washington Consensus

Most episodes of unilateral reform have been characterized by a dominant policy orthodoxy with respect to promoting sectoral efficiency as a mechanism for stimulating the development of poorer countries, and which is closely related to the concepts introduced in Part I. Such reforms are on the one hand, defended as necessary for promoting agricultural growth; and on the other, attacked for resulting in the marginalization of resource-poor farmers in many developing countries and thereby limiting the extent to which the agriculture sector can contribute to wider growth. In order to allow a considered assessment of this debate, the following sections discuss the appropriateness of the orthodox approach, often referred to as the “Washington Consensus”.

What is the Washington Consensus?

Srinivasan^[105] comments that “in 1990, Williamson coined the term “Washington Consensus” to describe the lowest common denominator of policy advice, in terms of a set of analyses and prescriptions, being addressed by the Washington institutions as of 1989”. He notes that whilst there has been considerable success of many elements of the package, the consensus has come in for criticism over the past decade, and suggests that it is not so much the instruments themselves but the context in which they have been used that has resulted in lower than expected results. For instance, he makes the point that the response to any policy change, such as trade liberalization, that operates through price incentives depends both on non-price factors and the time horizon; and that if domestic supply constraints (other than the price received) are severe in the short to medium run, removing all price distortions would have only a limited favourable response. In analysing the impact of reform, assessment of complementary policies and of the context is therefore essential.

Stiglitz^[106] takes a similar tack, suggesting that ideas developed for Latin America - the three pillars of fiscal austerity, privatization and market liberalization - have been inappropriately used in other developing countries at earlier stages of development. He also, suggests that whilst the key processes of globalization (reduced costs of transactions and decreased barriers to the movement of goods and services) are similar to those associated with earlier processes in which national economies were formed, there is no accountable “government” to oversee the process of globalization. Partly as a reflection of these criticisms and internal evaluations^[107], the Washington Consensus has evolved considerably since the early 1990s, and now includes strong emphasis on poverty, institutions and governance, participation and environmental sustainability.

The World Bank makes the important point that structural adjustment is policy and institutional reform that takes place at a country level with or without external support^[108]. It gives the example of Malaysia as country that has adjusted without external support. Adjustment lending is the means through which the Bank responds to client countries’ requests for financial and policy support in the process of adjustment.

Indeed, only as recently as 1999 did structural adjustment lending first exceed a quarter of total World Bank lending. In the 1980s the World Bank approved 191 adjustment operations in 64 countries totalling US$27 billion (17 percent of its total lending). In the 1990s this had increased to 346 operations in 98 countries totalling US$72 billion (29 percent of total lending). The main instruments by which these funds have been allocated are Structural Adjustment Loans (SALs) and Sectoral Adjustment Loans (SECALs), although more recently, subnational adjustment loans (SNALs) have increased in prominence, particularly to larger federal economies or at the state level, such as in Argentina and India. In the period 1980-2000, the 537 structural adjustment operations in 109 countries comprised 255 SALs and 233 SECALs with an annual average of 26 operations at US$184 million per loan^[109].

A shift in donor financing took place between 1980 and 1985from project based towards structural adjustment lending. Early adjustment loans focused on the achievement of economic stability (in the main, to help provide balance of payments support following the 1979 oil shock, so that countries could focus on stabilizing their economies) and on correcting distortions. The loans tended to support macro-policy reform such as trade liberalization, privatization and financial restructuring, designed to increase efficiency. Little attention was paid however to the social impact. It is this early lack of attention that is still used as a main point of criticism of structural adjustment programmes. During the remainder of the 1980s, the deep-rooted institutional and structural weakness that were causing weak performance became apparent, and lending became more focused on the short-term impacts on the poor (who tended to suffer most) and measures to alleviate them, for example: compensatory measures including public works and microcredit, and the maintenance of social spending.

During the 1990s, reform of financial and private sectors and public sector management have taken precedence over stabilization measures and greater emphasis has been put on poverty reduction and social sector reform, with the proportion of poverty-focused adjustment operations rising from 31 percent of all lending in 1995 to 69 percent in 1999^[110].

The change in emphasis has been credited with improved performance of the loans. The World Bank’s own evaluation suggests that loans performing successfully have risen from 60 percent in the 1980s, to 68 percent in 1990-94, and to 86 percent in 1999-2000^[111]. Over recent years, however, there has been greater selectivity of above-average performers. In the 1980s, 25 percent of countries taking loans had taken 4 or more; in the1990s this number had increased to 42 percent. Three countries (Argentina, Ghana and Mexico) had each taken more than 15 loans.

The World Bank characterizes the goals implicit in adjustment lending as:

• stabilizing the macro economy;

• promoting economic growth and poverty alleviation;

• fostering openness;

• improving transparency in incentives;

• enhancing efficiency in resource allocation;

and more recently:

• broadening the scope for private sector development;

• strengthening institutions and capacity for policy analysis.

The main prescriptions of the Washington Consensus relate to price policy; fiscal policy; exchange rate policy; credit policy; trade policy; institutional reform; investment policy; and other less tangible, but no less important, areas of reform relating to improved democracy and governance, including reforms to better transparency and the rule of law^[112].

Figure 6.1 Trends in conditional lending by sector

FY = Financial year
Source: World Bank. 2001. Adjustment Lending Retrospective.

Stiglitz suggests that inappropriate sequencing and pacing of reforms were amongst the “biggest blunders” of the IMF^[113]. Liberalization often occurred before safety nets were in place, because he argues, of the misplaced emphasis on market fundamentalism when the reality was one of imperfect information and imperfect markets. Relating this to the agriculture sector, Stiglitz notes that the abandonment of pan-territorial pricing was often forced before improved road systems were in place and that this often resulted in remote, poor farmers becoming poorer.

The Washington Consensus applied to agriculture^[114]

Most adjustment lending to the agriculture sector has been in the form of SECALs. These operations have often not met expectations and have in recent years diminished in importance, as reflected in Table 6.2.

Table 6.2 Share of IBRD and IDA adjustment lending by sector, 1995-2000 (percent)

Source: World Bank. 2001. Adjustment Lending Retrospective.

Recently, the World Bank has developed explanations of why the agricultural sector has failed to fully realise its potential in bringing about rural development and poverty reduction^[115]. Agriculture is perceived as insufficiently competitive in the world market and, in many cases, as facing skewed distribution of resources and adverse resource endowments. For instance, Africa has inadequate irrigation, and in almost all developing countries traditional large-scale state managed irrigation schemes require continuing subsidy (especially maintenance costs). Soils are deteriorating, both in pre-Green Revolution areas, resulting principally from continued mono-cropping without adequate fertilizer application and/or soil conservation; and in Green Revolution areas, because of contamination of soils from inadequate drainage, water-table depletion, and salt-water infiltration. The key problems are identified as policy and institutional failures. Kydd and Dorward^[116] suggest that policy failures are conceptualized by the Washington Consensus as the suppression of agricultural incentives through economy-wide policies which discriminate against agriculture; excessive explicit taxation of agriculture; urban bias consequent on the weaknesses of political institutions; and quantitatively inadequate, while also inefficient, support for agriculture. These failures are used to prescribe greater private sector incentives to engage particularly in input provision; sustainable resource management; commodity diversification, especially into non-traditional crops; decentralization of service delivery; and participation of farmers in setting objectives, conducting research and evaluating results.

Examples of these prescriptions are captured in Box 6.1,which provides a summary of specific policies aimed at reforming the agricultural sector in the countries studied in the SAPRIN study.

Kydd and Dorward stress that although “the growing institutional emphasis in the Washington Consensus on Agriculture is to be welcomed, it is not sufficiently focused and does not go far enough”: it tends to focus on the effectiveness of political institutions and the organizational capability of governments, including issues such as freedom of association, transparency, accountability and the extent of devolution of decision making; and the strength and effectiveness of civil society organizations, such as farmers’ organizations and NGOs. They argue that while this is critically important, much more emphasis needs to be given to the development and evolution of “institutional arrangements”, and this is important in considering constraints to and expansion of food crop productivity. This theme, and in particular, the role of the state, is developed further in Chapter 8.

There needs to be greater recognition of the different challenges facing areas at different stages of agricultural modernisation, in particular, differentiating between those areas which have not yet experienced agricultural modernisation and those which have gone through the early stages of such modernisation, with associated development of institutions and of the non-farm sector. Experience from agricultural modernization in Green Revolution areas in Asia and Latin America and from the few and sometimes short lived Green Revolutions in Africa, shows that achievements in the past have been gained through, or associated with, large scale investments in development of appropriate technology, supportive policies, and infrastructure and support services enhancing the functionality of input and output markets, seasonal finance, and extension.

However, whilst subsidies to agriculture in OECD countries have increased 5 - 10 percent in nominal terms over the last 15 years to US$300 billion per year, developing country expenditure on agriculture has typically fallen. This raises serious questions regarding the commitment of governments to agricultural development, as well as the appropriateness of the current orthodox prescriptions towards the sector.

6.5 Multilateral reform: the WTO reform process^[117]

Apart from the obvious fiscal constraints to the state adopting a greater role in facilitating agricultural development, additional constraints may be imposed by multilateral agreements that are attempting to move in the opposite direction. These agreements can reduce further the flexibility available to developing country governments aiming to stimulate development by providing protection and/or support to the sector.

The principal objective of the UR AoA negotiations was to bring some discipline to the distortional policies in OECD countries, which few developing countries are able to afford. However, the FAO has stressed that the Agreement leaves a substantial imbalance in the remaining levels of domestic support and export subsidies allowed to developed countries, on the one hand, and to developing countries, on the other. The “standstill and roll back” principle underlying the Agreement implies that developed countries and some of the richer developing countries have WTO rights to their remaining high levels of support and protection mechanisms, while developing countries’ rights to initiate the use of similar support and protection are subject to considerably lower levels. Unless the levels of support and protection of the less fiscally constrained countries can be brought down quickly, the imbalance in support levels, together with the constraints on developing countries’ policies, could slow and hinder adjustment in the latter.

The three pillars of the AoA

In this section, potential constraints imposed by the UR AoA are considered.

Domestic support

In negotiating the Uruguay Round Agreement on Agriculture (AoA) it was recognised that domestic support to agriculture had the potential to distort trade via its encouragement of excess production which, by depressing world prices reduced incentives for production in regions holding a comparative advantage in those production activities. At the same time, it was recognised that not all domestic support measures will potentially cause significant distortion. The AoA reflects this by categorising policies into one of three boxes:

• Amber box which includes domestic support subject to reduction commitments such as market price support and input subsidies. These supports are subject to limits: “de minimis” minimal supports are allowed (5 percent of agricultural production for developed countries, 10 percent for developing countries); the 30 WTO members that had larger subsidies than the de minimis levels at the beginning of the post-Uruguay Round reform period are committed to reduce these subsidies,

• Blue Box which allows exemptions to support measures involving direct payments under production limiting programmes based on fixed area, yields or livestock units, and

• Green Box which exempts measures consisting of publicly funded support that do not have the effect of providing price support to producers and having “no, or at most minimal, trade-distorting effects or effects on production”. They tend to be programmes that are not targeted at particular products, and include direct income supports for farmers that are not related to (are “decoupled” from) current production levels or prices. They also include environmental protection and regional development programmes.

Global levels of Amber Box support remain high and the distribution is skewed against developing countries. The majority of developing countries have reported zero or less than de minimis total base AMS levels. Most of these countries have no reduction commitments on domestic support, but neither do they have WTO rights to use Amber Box support in excess of the de minimis level in the future. Although many of these countries are not currently constrained by the domestic support provisions of the Agreement, they may find their policy options limited in the future. Although there has been some reduction in the use of Amber Box subsidies, this has been more than counteracted by the increased use of transfers falling within the Green Box and Blue Box exemptions. However, as Oxfam stresses, although considered minimally trade distorting, these interventions still impact on production decisions by reducing the risks faced by producers.

Market access

High levels of border protection in many developed countries are an impediment to exports from developing countries. However, because some developing country exporters benefit from preferential access to these markets in some heavily protected products, it is difficult to achieve consensus among developing countries on reducing such barriers.

An across-the-board reduction in tariff bindings on agricultural products could also leave little room to provide a degree of protection for sensitive sectors. In addition, some countries have bound their tariffs at very low levels and consequently now have little room for manoeuvre in the use of the tariff as a contingency measure against price fluctuations on world markets.

Whilst special safeguard (SSG) provisions are designed to allow an importer to increase tariffs above bound levels in response to a surge in imports or a decline in import prices, most developing countries do not have access to such measures, because the agricultural SSG measures were reserved for countries undertaking tariffication. Maintaining the SSG under present conditions will perpetuate discrimination against WTO members who do not have the right to safeguard measures. Some suggestions have been made to eliminate the SSG altogether.

Export subsidies

Export subsidies further distort global markets and can destabilize world prices, as developed countries tend to use subsidies more when world prices are low, thus further depressing prices. On the other hand, subsidized exports tend to fall when world prices are high, just at the time when developing countries might be said to benefit from subsidized supplies. Currently, the EU is by far the largest user, accounting for about 90 percent of use^[118]. In the past few years, many countries have eliminated or suspended export subsidies on some or all commodities beyond their UR AoA requirements. This maybe in part due to high world prices in the early years of implementation, which allowed countries to export without subsidies and in part due to the changes in domestic support measures as outlined above.

An alternative policy is the use of export credits, which provide access to financing which lowers the total cost of the exporter’s goods. Export credits used on agricultural products increased from US$5.5 billion in 1995 to US$7.9 billion in 1998.

Related to export subsidies, the practice of dumping by private agents is said to exist if the export price into another market is less than the cost of production in the country of origin plus reasonable additions for selling cost and profit. Actionaid suggests that there are two main impacts: first, low cost imports will put domestic firms out of business; and second, exporters will have to sell into the world market at a lower price to avoid loss of market share. The gap between the export price and the cost of production has been used by Oxfam as an index of export dumping. They find that in the United States and EU, the wheat export price is 46 percent less and 34 percent less than the cost of production respectively. In the EU, the sugar export price is only 25 percent of the production cost.

One cause for concern is that the Doha Round might result in reductions in developing country tariffs that are more rapid than the removal of production and export subsidies in developed countries.

Constraints on the capacity to increase production

Although the focus of many contributions to the debate is on redressing the imbalance by achieving reduced levels of OECD protection, there is increasing (though by no means widespread) recognition that many, particularly poorer developing countries will simply not be in a position to expand their agricultural production to the degree required to take advantage of increased prices and enhanced market access, if it materialises. As discussed in Section 6.4, the capacity of developing country agriculture sectors to respond has to some extent been reduced by the structural adjustment programmes that have been implemented, especially the reduced investment in a range of agricultural and related services.

In support of the AoA, it is often noted that it gives countries sufficient flexibility to invest, not just in terms of the de minimis concession, but more promisingly, through Green Box type interventions. However, developing countries are limited in using such policy options both by budgetary constraints, where, particularly in economies with limited resources, the transfer efficiency to producers is important; and by institutional constraints, given that different policies will impose different levels of administrative burden on these countries. Administratively, Green Box policies tend to need more sophisticated administration than price support policies, which is relatively easy to implement, given that a predetermined price is paid on each unit quantity sold to agents included in a government scheme.

Green Box policies can be broadly divided into General Services, Food Stocks and Aid, and Direct Payments. At present, the majority of Green Box policies utilized by developing countries fall within the General Services Category (mainly research, pest control, extension and inspection). Within this category, the budgetary constraints are likely to be most apparent, given the reliance on budgetary outlays to provide the services. By their nature, the transfer efficiency to farmers is also likely to be lower than would be the case with price support measures. The absorptive capacity of the sector will also be important. Often, the research infrastructure, for example, may require restructuring before expenditure on research, training and extension related to new export opportunities is effective.

In order for Direct Payments to be made, in addition to adequate funds being available, some recourse to information about productive activities in a base period is required. There are three main issues here. First, there is often no information about farm incomes and that it is only in developed countries that a more systematic collection of information based on the farm accounts is taking place. Second, annual output, yields and prices often vary considerably, resulting in high variability of income, making compensation policies difficult to implement. Third, although income support is usually provided directly to individual farmers, in many cases the necessary institutions (complete national land registration, land tenure rules to determine who receives the payment, efficient and integrated commodity markets, sufficient government credibility to transfer resources not on a per unit production basis) may not be supportive or indeed may not exist^[119]

Calls for change

In his foreword to a recent Oxfam report, Sen states that “the basic objective [of reform] is to combine the great benefits of trade to which many defenders of globalization point with the overarching need for fairness and equity which motivates a major part of the anti-globalization protests.”. It is very much in this vein that proposals for changes in the rules governing trade have been made.

At a general level, Oxfam calls for policy goals to include: increased market access and reduced use of export subsidies; an end to conditionality; and the promotion of diversification. Similarly, CAFOD stresses the need for an increase in the ability of developing countries to promote agriculture, proposing changes which would increase flexibility to enhance domestic production and protect livelihoods and to overcome supply-side deficiencies. It also calls for an increased ability to export to OECD country markets, requiring the latter to keep promises to open their markets, to reduce tariff peaks, to agree a comprehensive ban on export dumping and to recognize the rights of developing countries to protect agriculture.

While the Agreement on Agriculture acknowledges the need for special and differential treatment (SDT) for developing countries and has a number of provisions on the subject, these provisions have been seen by many as falling short of what is necessary and as failing to provide the requisite policy flexibility.

As a result, the concept of a Development Box has been proposed as a mechanism for protecting the poor from import surges and enhancing the efficiency of domestic production^[120]. This would apply to developing countries only, and within these countries the focus would be on resource-poor, low-income farmers and on the main food security crops.

Such proposals for change to the AoA recognize the need to improve agricultural productivity in developing countries. In the previous section, it was demonstrated that despite the fact that the sector has an important role in improving access to food, there is current debate in the international donor community as to the extent to which the sector has the potential to actually play this role as an engine of growth and development. Perhaps more importantly, there is also widespread disagreement on how best to ensure the appropriate investment required to allow the sector to contribute its potential.

6.6 Changes in markets facing agricultural producers

The existing agreements and current negotiations on multilateral trade liberalization are not, however, the only drivers of change in market systems and in the incentives faced by developing country producers. Compounding the difficulties, but at the same time opening potential opportunities, are radical changes in the structure and conduct of global and domestic markets, changes which have been facilitated by both cost-reducing advances in technology and by reduced barriers to both trade and foreign direct investment.

The 2001 IFAD Rural Poverty Report^[121] states that “under globalisation, [local] market access becomes increasingly important as only those who have it can exploit the new opportunities. Without such access, the potential benefits of higher product prices and lower input prices are not transmitted to poor households. With closed markets, such households can be protected against lower product prices, higher input or consumption prices and price fluctuations, though usually at high economic cost. Remoteness also restricts access to information about new technologies and changing prices, leaving the poor unable to respond to changes in incentives. Supply response will also be affected by many other factors, such as access to assets, skills and credit.”

The past decade has seen radical changes in the characteristics of, and access to, markets facing agricultural producers. Assumptions that changes in, for example, OECD policies will result in increased world prices, and that these increases will be passed on to all producers regardless of location or type, have received inadequate scrutiny. Whilst there have been numerous studies of country- or commodity-specific price transmission from border to producer, far less attention has been paid to the ways in which the structure and conduct of output markets and the supply chains that feed into them are changing; or to what this means for different categories of producers in different regions of the world.

6.7 Conclusion

The following chapters raise a series of questions about the relative power of different actors and about institutional aspects. Of particular interest is the degree and form of market access facing different sets of actors and as they relate to different commodity sets. To trade economists, the term “market access” is generally associated with the ability of developing country exporters to sell to developed country markets. In this discussion the interest is not in this albeit important issue, but in the access that domestic producers have to, for example, input and output markets and services. A motivating factor for researching this issue in the context of the current negotiations on global trade reform is the impact of increased exposure to competition on resource-poor farmers. Oxfam^[122] asks whether small scale farmers can compete in a liberalized environment and whether there is a need to retain some level of protection. Sharma^[123] notes that missing markets for the poor and resulting higher costs of production may push them out of the subsector; he cites the case of jute in Bangladesh.

A key question that arises in relationship to the IFAD statement on market access is therefore, what form of protection against market exclusion would be required and what is the associated economic cost, i.e. what is the cost-benefit ratio of intervention?

This chapter has introduced a number of unresolved debates that require further investigation if the relationship between trade liberalization and food security is to be better understood. In the final part of this publication, the issues raised in this chapter, and elaborated in the remaining chapters of Part II, are used to inform the development of a conceptual framework and a series of guidelines for its operationalization.