HIGH-LEVEL ROUND TABLE ON
Rome, 13 April 2005
1. The decades of the 1980s and 1990s have witnessed a general trend towards trade liberalization and economic reform in virtually all parts of the world. The issues surrounding these developments are being widely debated today in the context of the ongoing WTO agricultural negotiations under the Doha Development Agenda, and the challenges inherent in meeting the Millennium Development Goals. It is in this context that this High-Level Round Table is being organized, to coincide with the 65th Session of the Committee on Commodity Problems (CCP) and the 19th Session of the Committee on Agriculture (COAG). The Round Table provides a forum for discussing these issues and sharing experiences related to the process of agricultural trade liberalization and its impact on food security and poverty.
2. In order to have a focused debate, it is proposed that the Round Table discusses the following three key questions, as they seem to be both pertinent to, and touching on the most controversial aspects of the ongoing policy debate.
3. This Background Paper synthesizes key issues on the three questions in order to facilitate the Round Table discussions. The paper is meant to stimulate discussion and should not be construed as representing FAO positions.
4. Protection in support of the agricultural sector, although widely used, has always been controversial in the history of agricultural development. Agricultural protection has been blamed not only for higher resource costs and inefficiencies in markets at home, but also for creating economic costs for trading partners, such as lower levels of exports, and more market instability.
5. Border protection is one component of a range of policy interventions that governments have used to achieve various objectives in relation to their agriculture sectors. The forms of intervention have differed significantly across countries, not only because the objectives have been different, but also because of significantly different country specific situations.
6. While theoretically there are situations where border protection can increase overall welfare in a country, trade theory does not, on the whole, consider border protection to be the first-best policy to achieve domestic objectives. Yet, border protection of agriculture has been a common feature in the development of many countries, particularly in developed countries.
7. While some countries have undertaken significant trade reforms and reduced actual trade barriers, agricultural border protection remains high in many countries. The level of bound tariffs – i.e. the maximum duty a country can apply under WTO commitments – is estimated to be about 50 percent (simple average) for developed countries and 60 percent for developing countries. However, actual levels of protection, determined by duties applied at any given point in time, are generally lower (on average about 16-17 percent for both the developed and developing countries). Applied tariffs in developed countries are particularly high (sometimes several times the simple average) for several basic food items, such as rice, meat, sugar and dairy products.
8. The discussion in this part of the Round Table could focus on the circumstances under which agricultural protection can be called for to enhance, and ultimately ensure, food security and other domestic objectives. In particular
9. Virtually all developing countries have been undergoing trade liberalization in the context of wider economic reforms, as well as agricultural sector reforms since the 1980s. Agricultural policy reforms have also been undertaken by almost all developed countries. This process has been reinforced by the Uruguay Round Agreement on Agriculture since 1995, and will continue with the implementation of the new agreement that is expected to follow from the Doha Round trade negotiations.
10. Countries hold different views regarding the extent to which further trade liberalisation is appropriate. This is partly influenced by the debate on the impact of trade liberalization on food security.
11. The reported actual experiences of individual countries vary substantially in this regard. There are examples where trade liberalization has been associated with reduced poverty and enhanced food security, and others suggesting that freer trade has increased poverty and brought about negative impacts in food security. Thus, the answer to the question whether agricultural trade liberalization threaten food security and the goal of reducing rural poverty depends critically on the socio-economic environment in which trade liberalization is implemented, as well as its speed, sequence and timing of reforms. Where the basic preconditions (functioning institutions, markets, infrastructure, safety nets, etc.) are in place, and where reforms are phased in so that consumers and producers can adjust to a new trade regime, trade liberalization is likely to improve food security. Obviously the opposite holds where these basic preconditions are not in place.
12. Taking into account these considerations, the Round Table may wish to focus its discussions on the following questions.
13. Countries differ significantly in their state of agricultural development and the role the sector plays in their national economy, employment and food security. A reading of history suggests a wide range of complex experiences of how agricultural sectors evolve as countries develop. The most common feature is that in agrarian societies, most resources are devoted to the provision of food. As national incomes rise, the demand for food increases much more slowly than other goods and services. New technologies for agriculture lead to expanding food supplies per hectare and per worker, and the increasingly modernizing economies use more intermediate inputs purchased from other sectors. This decline in agriculture’s share in GDP is partly the result of increased post-farm gate activities, such as taking produce to market, that become commercialized and are taken over by specialists in the service sector, and partly because producers substitute other inputs and machines for labour. Many countries that have achieved sustained agricultural growth have gone through such phases of agricultural modernisation and growth and in these different phases, significantly different policy interventions have been found to be most effective.
14. The transformation of agriculture from one of low-intensity, low-volume production to one that produces the sustained surplus needed to generate growth in the wider economy, will only happen under certain conditions. These basic conditions include investments in improved infrastructure, research, extension, etc. Once the transformation starts, however, and in order for the sector to generate the surpluses required for it to fulfil its important role of supporting overall economic growth, empirical evidence suggests that agriculture can significantly benefit from a “kick-start”, generally provided through appropriate state engagement to stimulate agricultural growth. Such stimuli include measures to reduce risks to producers seeking to invest in improved technologies, or enabling access to seasonal credit and to input and output markets on more favourable terms, etc. Several countries have instituted border protection for agricultural products as part of these interventions. Many such interventions are by definition coupled in nature and may not be WTO compatible. However, without such interventions, necessary investments in agricultural activities may not be made by producers or by the private sector, given the high incidence of market failure and associated high transaction costs and risks.
15. Freer agricultural trade must be considered for each country in the above context, and in particular by asking whether the policies that have been put in place to achieve the agricultural growth and food security objectives relevant to the level of development of the country can or should survive in the context of freer agricultural trade. A case in point, that has received considerable attention, is the withdrawal of government marketing parastatals in favour of the private sector, in the context of a more liberal agricultural trade regime. The view in support of this is that the absence of direct state support provides a better environment for development based upon private sector activity. Evidence, however, is mixed. In some cases, the private sector has emerged to provide the products and services that the state sector provided earlier. However, this phenomenon is more often seen in the case of cash crops and much less so in the case of cereal/food sectors that are central to agriculture’s developmental role in economies with large rural sectors. For instance private sector constraints have at times led to situations in some low income food deficit countries, where the availability and cost of food in domestic production shortage situations was not commensurate with national food security objectives.
16. The arguments elaborated above suggest that putting in place the environment required to support the initial stages of the transformation of the sector is essential before liberalizing agricultural trade policy. Studies support this contention, demonstrating that countries successful in stimulating agricultural growth are those that have liberalized from a position of strength in terms of having less vulnerable agriculture sectors. Such countries have tended to lift the constraints to continued growth in a sequential manner, at the same time intervening to secure the necessary favourable environment for the transformation of their agriculture sectors, rather than adopting a liberal trade policy stance from the start.
17. Once agriculture has achieved a certain level of development and volumes of production and trade have expanded sufficiently, the role for intervention to stimulate further productivity improvements is reduced because risks and transaction costs have been lessened, and markets tend to function more efficiently. At this stage, history suggests that other objectives, less related to increasing levels of production become relatively more important. These objectives may best be met by using less coupled forms of policy support, with associated reduced reliance on border protection. This is a change in policy direction that is currently being pursued by some developed countries.
18. A key message from the above is that public interventions in agriculture should not always be regarded negatively. For example, interventions maybe justified if directed at correcting market failures that prevent required investments in agricultural activities in which the country could hold a comparative advantage, as in the case of agriculture in many poor countries today.
19. The wide diversity in the state of the economy and agriculture also influences the range of policy instruments that are feasible. For example, higher-income countries typically have a more developed tax base and so they need not rely on border measures (import and export taxes) to generate revenue. They have more resources to implement taxpayer-funded support measures. Such policies are usually costlier to implement than border measures. The same applies to the ability to put in place safety net measures for sub-sectors and population groups during the transition to freer trade. Less developed countries may not have the domestic fiscal resources to implement such policies, and hence may need to rely more on border measures.
20. This implies that the agricultural policy instruments and options that are both feasible and appropriate to supporting agriculture are not the same for countries at different stages of development. The challenge lies in identifying the appropriate conditions as well as appropriate measures, including the degrees of border protection, for achieving different sets of objectives at different stages of development. The identification must come from experience on the ground, and lessons learnt elsewhere. In this regard, recommendations from studies on trade liberalization in relation to agricultural development, poverty and food security often emphasize the following three aspects that each country may need to take into account in charting a course for agricultural trade policy in general and trade liberalization in particular:
21. These issues could provide the background for the exchange of views and experiences at this Round Table. In this context, it may be important to also take note of some of the basic principles that the appropriate trade policies should adhere to: