Outlook for developing country economies highly dependent on agricultural trade

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This section examines the economic and agricultural prospects of two groups of countries regularly monitored in The State of Food end agriculture: economies that are highly dependent on agricultural exports (EHDAEs); and low-income fooddeficit countries (LlFDCs) that face particular problems in financing their food imports (FDCs). The country composition of these groups is shown in Tables 1 A and 1 B. The following section presents a special analysis of the problems and issues facing FDCs.

Given its pronounced agricultural export orientation, the EHDAE group is forecast to benefit greatly from the recent increase in commodity prices. Its agricultural export growth is expected to accelerate from 4 percent in 1993 to 10 percent in 1994 and then settle at around 6 percent per year for 1995-98. EHDAEs in Africa are forecast to enjoy a more dramatic but short-lived commodity price bonanza than those in Latin America and the Caribbean. Agricultural export growth in the African countries in this group is expected to bounce to over 20 percent in 1994 but then to slow down to only 3-4 percent in 1995-96. This may be explained by. the more narrow agricultural export base of African countries and by the strong weight of single commodities such as cocoa, for which market prospects do not appear encouraging in the long-term.

The strengthening of commodity prices should contribute to a significant improvement in the terms of trade, purchasing power of agricultural exports and trade balances of these countries.

Again, however, such improvements are forecast to be dramatic but also short-lived. In African EHDAEs, after a long period of almost uninterrupted deterioration, the barter terms of trade of agricultural exports improved by an estimated 25 percent in 1994 and an improvement of a further 7 percent is forecast for 1995. This would enable the purchasing capacity of agricultural exports to increase by about 24 percent in 1994 and 3.3 percent in 1995. However, these gains are forecast to be largely eroded in the following years, as the deteriorating trend of agricultural terms of trade is expected to resume in 1996. The forecast trends are similar, though less pronounced, for EHDAEs in Latin America and the Caribbean. In particular, gains in purchasing capacity of agricultural exports are forecast to be relatively small in 1994-95 but the successive deterioration is also expected to be more gradual and moderate.

Figure 5

TABLE 1A
Economies highly dependent on agricultural exports¹

Sub-Saharan Africa Latin America and the Caribbean Asia and the Pacific
Côte d'lvoire Argentina Sri Lanka
Malawi Paraguay Thailand
Zimbabwe Honduras Afghanistan
Mali Cuba Viet Nam
Sudan Uruguay Malaysia
Madagascar Brazil  
Burundi Guatemala  
Cameroon Costa Rica  
Ghana Colombia  
Liberia Saint Vincent and  
Uganda the Grenadines  
Kenya Ecuador  
Ethiopia Guyana  
Rwanda Belize  
Swaziland Dominica  
Mauritius Nicaragua  
Central African Republic El Salvador  
Tanzania, Dominican Republic  
United Republic Sao Tome and Principe  
Chad    
Burkina Faso    
Somalia    
Benin    
Guinea-Bissau    
Gambia    

¹ Countries for which agricultural, fishery and forestry exports were equivalent to 20 percent or more of their total export earnings, or 20 percent or more of their total imports, in 1988-90.

TABLE 1B
LlFDCs with the lowest capacity to finance food imports (FDCs)²

Sub-Saharan Africa Latin America and the Caribbean Asia and the Pacific Near East and North Africa
Cape Verde Haiti Samoa Egypt
Gambia Nicaragua Bangladesh Yemen
Lesotho Dominican Cambodia Sudan
Djibouti Republic Afghanistan  
Mozambique Nepal    
Guinea-Bissau Laos    
Somalia   Sri Lanka  
Comoros   Maldives  
Sierra Leone      
Ethiopia      
Burkina Faso      
Togo      
Senegal      
Benin      
Rwanda      
Mali      
Mauritania      

² LlFDCs for which food imports accounted for 25 percent or more of their total export earnings in 1988-90.

FDCs present the somewhat paradoxical feature of being both foodimport dependent and agricultural export-based economies. Indeed, several countries belong to both the FDC and EHDAE categories. The increase in commodity exports can be expected, therefore, to have mixed effects for this group. On the one hand, their rising food import costs are likely to become more of a financial burden (even though the cereal price increases following the GATT Uruguay Round and agricultural reform in major exporting countries may be smaller than were suggested by early estimates- see Part III, p. 199). On the other hand, these countries will also benefit from the increase in prices of several of their main export products. The net result of these opposing influences is expected to be positive in the short term, as food import costs in FDCs are forecast to rise at a slower pace than export earnings from agriculture (approximately 7 percent and 18 percent per year, respectively, in 1994-95). In the longer term (1996-2000), however, the growth in food import costs is expected to rise to over 8 percent per year, while that in agricultural export earnings is forecast to decelerate sharply to less than 2 percent in 1996-97 and to increase only moderately thereafter. The agricultural trade deficit is forecast to narrow initially (from $US2.5 billion in 1993 to $2 billion in 1994 and $1.8 billion in 1995), but widen again to $3-3.5 billion in the following years. The overall trade deficit, estimated at about $17 billion in 1994 (about the same as in 1993), is forecast to increase slightly in 1995 and more markedly in the following years.

A number of observations can be drawn from the above review. Two general influences will largely determine the economic and agricultural outlook of the developing countries; the first of these is the expected continuing improvement in the global economic environment, which the developing countries will both contribute to and benefit from. The second influence is the strengthening of international prices of several important export commodities. The two influences are interrelated, to the extent that, on the one hand, better economic conditions can be expected to sustain the demand for and prices of agricultural commodities, while, on the other hand, the windfall gains from improved commodity markets not only provide a welcome boost to many stressed economies, but also generate opportunities for consolidating stabilization and reform, thus enabling countries to take better advantage of the improved economic environment. The latter effect is, however, conditional on a number of factors. There is a well-documented tendency for long-strained governments and individuals to consume, rather than capitalize on, sudden and large windfalls. The risk of this happening is all the more pronounced if complacent perceptions emerge on the nature and sustainability of such windfalls.

In the worst of scenarios, the windfall gains would contribute little to enhancing growth and welfare in the long term. In the short term they would create immediate financial management difficulties and "Dutch disease" effects leading to excessive currency appreciation and competitive losses. In other words, the windfalls may create as many problems as they solve and may mean, for the countries concerned, an eventual return to the status quo ante.

However, sound and timely policy action can avert this negative turn of events. Such action involves: first, a full awareness of the narrow base and transient nature of the commodity price bonanza; second, that governments view the bonanza as a developmental, rather than a short-term political opportunity; and third, that the right choices are made among a wide range of policy options. For instance, windfall gains can be used to invest in the most productive sectors or to encourage a broad-based participation of less favoured segments of the society. Governments may place priority on reducing macroeconomic imbalances and debt or decide that productive investment comes first. Financial resources may be used on domestic assets, programmes or projects, or invested in a diversified international portfolio as a means of reducing risks. The relative merit of the various options will depend on country-specific needs and circumstances. It is important, in any case, that due priority be given to the agricultural sector, bearing in mind its food security and economic role in the countries concerned and the disastrous sequels of past policies that neglected or overtaxed the sector.

III. Selected issues

Introduction
The evolution and structure of food imports
Origin of imports
Export structure and agricultural exports
Sustainability of high food import dependence
Food consumers in the policy process
Whither policy reform?
Food consumption and the demand for food
Policy reform and food prices
Protecting vulnerable groups of consumers
In conclusion

FOOD IMPORTS AND EXPORT PERFORMANCE IN LOW-INCOME FOOD-DEFICIT COUNTRIES WITH THE LOWEST CAPACITY TO FINANCE IMPORTS

Introduction

Although agriculture generally dominates their economies, many low-income developing countries have been net food importers for a long time. Furthermore, over the last two decades the food trade balance has tended to deteriorate in many of them. Neither production nor the financial resources to import have kept pace with the growing demand for food. The ability to pay for food imports depends critically on export earnings which in many cases have been inadequate. These problems are particularly acute in the countries reviewed in this section, i.e. in those low-income food-deficit countries (LlFDCs) with the lowest capacity to finance food imports (FDCs). This group includes 31 countries and is a subgroup of the FAO-defined LIFDC group which currently comprises 88 countries.

The excessive food import dependence of many poor countries has always been prominent in the development debate, but the recent conclusion of the Uruguay Round of GATT negotiations has drawn even greater attention to the issue. Trade liberalization is expected to lead to higher prices for agricultural products in international markets. In addition, several of these countries will increasingly have to pay world market prices as export subsidies in their favour are reduced. This may provide an opportunity for increasing agricultural output and rural employment in the importing countries, as long as higher prices are allowed to reach the farmers. However, any longer-term benefits on the side of domestic production, exports and import substitution opportunities have to be weighed against the immediate problems of paying more to cover food import needs and possibly of higher prices to consumers.

Many FDCs are large recipients of food aid and other emergency relief arrangements. They have also benefited from external financial assistance and other forms of non-export-generated inflows. However, a longer-term solution is required, bearing in mind that the prospects for external assistance are not encouraging and that food aid resources, already declining in recent years, may decline further as a result of the decreases in food stocks that are expected to follow the Uruguay Round agreement. This review aims at providing quantitative information on some of the determinants of the problem, which can be helpful references for the design of appropriate policies for the long term.


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