FAO GENEVA ROUND TABLE ON FOOD SECURITY IN THE CONTEXT OF THE WTO NEGOTIATIONS ON AGRICULTURE 20 July 2001 Room XI Palais des Nations Geneva, Switzerland Incorporating food security concerns in a revised Agreement on Agriculture Discussion paper no. 2 (based on a longer paper prepared by Richard Pearce and Jamie Morrison) Food and Agriculture Organization of the United Nations

INCORPORATING FOOD SECURITY CONCERNS

IN A REVISED AGREEMENT ON AGRICULTURE¹

1 Introduction

This paper argues that the role of agriculture in enhancing food security in developing countries differs significantly from that in developed countries, a fact only partially recognised in the way that the AoA is structured. It is therefore contended that greater flexibility than is currently provided by the AoA is required for developing countries, particularly the food insecure developing countries, in order to pursue agricultural modernisation and to meet their food security objectives.

2 The role of domestic agriculture in enhancing food security in developing countries

In 1996-98, 826 million people were estimated by the FAO to be undernourished, with about 792 million living in developing countries. Although the number fell by 40 million between 1980-82 and 1995-97, this improvement was uneven, being attributable to a 100 million reduction in 37 countries, whilst in the remaining countries the numbers increased by 60 million. Although food availability for direct human consumption grew by 19 percent between 1960 and 1994/96, it is still very uneven. For example, per capita agricultural production in LDCs has been on a downward trend over the past 40 years whereas it has increased by 40 percent in the developing countries taken together². Between 1980 to 1996, negative growth was observed in 29 of the 42 cereal producing LDCs.

Careful analyses of the major factors underlying these trends have led FAO to state that “significant progress in promoting economic growth, reducing poverty and enhancing food security cannot be achieved in most of these countries without developing more fully the potential capacity of the agricultural sector and its contribution to overall economic development” ³. This is a view supported by a number of recent studies⁴ which have demonstrated that in many poorer rural areas, increasing the productivity of agriculture often has the greatest potential for poverty-reducing growth, either through direct income benefits and indirect expenditure linkages from the production of tradable commodities or through consumer benefits in the production of non-tradables⁵. Therefore, indicators of food security are often directly influenced by the relative success of rural development initiatives both in terms of increasing the availability and stability of national food supplies and enhancing individual access to food.

The liberalisation of trade is justified in part by the expected improvements in incentives for developing country producers, and therefore improved prospects for rural development. However for some developing countries there is unlikely to be an immediate benefit because of supply constraints and the inability of their producers to take advantage of new trading opportunities as well as to compete in their own markets against imports some of which are still benefiting from subsidies and other non-competitive practices.

3 Policy measures for enhancing food security

Development experience over the last 50 years has amply demonstrated that vast rural poverty and food insecurity in developing countries had largely been the result of development strategies that overlooked the importance of the development of the agricultural sector, particularly the production of staple foods. ⁶ Experience have also shown that enhancing food security in developing countries requires a well-designed and adaptable package of policies that address in an integrated manner the supply, distribution and consumption aspects of the food chain.

The policy options available to contemporary poor countries are constrained by a number of factors including: (a) limited resources for public spending programmes; (b) the dilemma between remunerative prices for producers and prices that a large number of poor households can afford, thus making the option of border protection less attractive, despite high bound tariffs⁷; (c) major constraints on foreign exchange availability leading to pressure to boost production of export crops. The channelling of resources to export sectors may however not always guarantee adequate foreign exchange for food imports⁸. Hence, from the food security point of view, import substitution is often a better option than export promotion.

What follows is a brief description of some specific policy measures that countries have used to enhance the food security of households or individuals, both directly (through programmes to boost food consumption and that provide targeted assistance) and indirectly via their farm programmes and trade policy. The most important of these policies are those that, given price support, affect input use, and are concerned with boosting food consumption.

Price Support

Price support is provided either by border measures alone or border measures in combination with domestic price arrangements (e.g. procurement prices, minimum guaranteed prices, target prices). Sometimes a border policy (e.g. a limitation on exports) that lowers farm prices in an effort to keep domestic food prices affordable to consumers is partially offset by administered prices allowing farm prices to rise somewhat. Usually, however, the border measure (e.g. tariffs) complements administered prices so that consumer prices may be higher than the corresponding world prices.

Depending on the combination of border and domestic price policies, various groups in society can find their food security affected differently. Thus, arrangements that lead to higher domestic market prices benefit farmers and hit the consumers. This can be mitigated by having targeted domestic food aid policies (e.g. rationing, fair price shops, income transfers to the poor) but only at a considerable cost to the budget, something that poorer, food insecure countries can hardly afford. Maintaining world prices for the consumer but paying subsidies to the farmer similarly also puts a drain on the government budget, something that can be to some extent offset in the case of imported foodstuffs by the revenue raised by import duties.

The situation for export products is similar to imported goods. Exports have often been taxed in the past to help keep down domestic prices (e.g. Thailand’s rice policy in the seventies and Indonesia’s palm oil variable rate-export tax), but this is usually at the expense of the welfare of farmers who in many cases may be poorer than the urban consumer. By contrast, policies that boost exports through subsidies can help farm incomes but at the expense of both the government budget and consumers. Export subsidies can be used to develop market access and are also useful options for disposing of atypical surplus in good harvest years⁹. Although their use is relatively widespread in developed countries, most developing countries do not use export subsidies.

Despite all the complications for food security of running an active price policy, it must be noted that for imported food products a mix of tariffs to sustain farm prices and the use of the revenue raised from the import duties to fund domestic food aid policies can be compatible with the WTO rules and efficient in terms of reducing rural poverty and food insecurity. Whether, however, the amounts of money raised from tariffs would be adequate to tackle the extent of domestic consumer food insecurity in the poorer countries is a matter of doubt and most likely would require extra resources to strike the right balance. All the other policies discussed below come with a price tag that may be prohibitive to many of these countries.

Input Subsidies

Input subsidies are often used to offset low producer prices. Typically, these cover items such as fertilizers, seeds and fuel. However, if not targeted, their use can bypass the poor producer and inefficient transfers may be made to better-resourced farmers. The effectiveness of targeting subsidies is demonstrated by developments in Malawian maize production, when in the early 1990s, output prices were liberalised and fertiliser subsidies reintroduced. This resulted in a 70% increase in maize production by the small scale sector and a substantial rise in fertiliser use¹⁰.

Facilitating the purchase of fixed capital stock (such as imported machinery, on-farm storage facilities) can enhance both productivity and reduce post harvest losses. Examples include Zambia’s Agricultural Investment Programme that provides (with donor assistance) matching grants to groups of farmers for building on-farm instrastructure.

Whilst infrastructure investment is currently exempt from AMS inclusion, it often provides a form of subsidy to producers In Sri Lanka for example, the cost and maintenance of irrigation facilities are provided free of charge to farmers. It is estimated that in 1995 irrigation subsidies comprised 3% of the total value of paddy production. In Egypt the adoption of advanced irrigation technology is seen as being essential to increasing water use efficiency¹¹. Investment in infrastructure can also be for the purposes of conservation. In South Africa, subsidised or low interest loans have been provided under the Conservation of Agricultural Resources Act.

Intervention to correct for institutional failure

Where markets do not function well, for example, there is poor market information, a monopolist-monopsonist, or political interference, the expected supply response may not occur. Here the promotion and/or strengthening of institutions governing access by poorer producers to input and output markets may result in a high impact at a relatively low cost to the government. Strengthening credit institutions by influencing the incentives faced by market intermediaries and financing of their costs can result in the provision of more reliable seasonal finance¹². Land tenure and rural finance institutions are often quite important, the former in allowing access to more productive land, investment in land, better decisions about land use, and greater consumption linkages; and the latter in promoting investment, particularly in seasonal inputs¹³. Overall, the provision of improved institutions, regulatory frameworks and training are possible but they may require subsidies to get them going.

Food consumption policies

One of the most widely used food security policies over the years has been assistance to public food stocks. To be compatible with the AoA, volumes and accumulation must correspond to predetermined targets related solely to food security. Food purchases by governments must be made at current market prices and sales from stocks must be made at no less than the current domestic market price of the product and quality in question. For developing countries this is modified to allow for stocks to be acquired and released at administered prices provided that the difference between administered and external reference price is accounted for in the AMS. In reality this does not represent any special treatment as any country can pursue such a policy provided that the associated expenditure is counted in its AMS.

Such schemes attract additional costs to the government in terms of the cost of accumulation, storage, price monitoring and distribution. The promotion of private storage and marketing by, for example, reducing barriers to entry, improving infrastructure and market information may provide a mechanism for displacing such costs.

Though widely used in the past, these policies have come under critical scrutiny more recently because of their relatively high costs. But in situations where physical availability of food is at risk, such stocks in conjunction with trade policies, can have a valuable role to play.

The provision of food, or provision of means to allow eligible recipients to buy food, at market or subsidised prices are not subject to WTO disciplines, largely because they do not go against export interests as they are trade enhancing. Although leakage can be reduced via targeting, this is generally associated with higher administrative costs. The efficiency of consumer subsidies often depends upon the type of food chosen. For example, in Brazil $1 spent on subsidising bread transferred about $0.18 to low income consumers, whereas the same amount spend in legumes transferred about $0.39¹⁴. Subsidising inferior grades can improve the effectiveness of a food subsidy.

There are a number of other policies used to provide food security safety nets in developing countries. Examples include targeted employment programmes, or food-for-work, which provide a safety net and can also create assets for example rural access roads, storage facilities and irrigation infrastructure. However, these are often costly and there is a need to take into account the scarcity of financial resources of developing countries in setting the criteria for income safety net programmes.

4 Meeting food security objectives – distortion versus effectiveness

The preceding discussion indicates that a variety of policy instruments can be used to increase production in support of the food security objectives of developing countries. The focus then falls on identifying mechanisms for raising support for domestic production in an efficient manner under existing domestic constraints, and at the same time, preserves the option to use more costly measures if resources become available in the future.

The criteria against which to assess alternative policy measures can be broadly categorised into efficiency, effectiveness, cost and equity. Efficiency is concerned with changes in the volume of trade resulting from any increase or decrease in domestic production and any impact on the level and variability of domestic or world market price. Effectiveness is concerned with the impact on food security status at the national and household levels in the short-run, and the extent to which it promotes rural development more generally, and hence food security in the long-run. The costs of different policies may be evaluated in terms of the burden on government and on consumers and producers. The impact on equity considers the relative strengths of the measures in terms of their ability to target poor producers and consumers.

Most policies will have some impact on trade volumes either directly, or by providing improved incentives to domestic producers. However in determining the significance of the relative effect of policies on trade, it is necessary to consider the “size” of a country, or group of countries, in world markets. It is assumed that the food insecure countries including LDCs will in general be too small to have a distorting impact on most agricultural commodity markets. In the case where this assumption is not valid recourse could be made to the type of market share cap envisaged in the Agreement on Subsidies and Countervailing Measures , Article 27.

In addition to the type of capping of market shares suggested above, another question is whether developing countries other than the food insecure and least developed countries with competitive large-scale agriculture sectors that produce significant proportions of their exports or import substitutes should be excluded from exemptions made on the basis of food security. Several typologies of developing countries in terms of the impact of trade liberalisation have been developed, but none of them investigate the structure of agriculture within these countries. ¹⁵As demonstrated above, the contribution of the agriculture sector to rural development and hence long term food security is significant and therefore it can be argued that exemptions should be made not on the basis of a country’s net trade position or agrarian structure, but on its current level of development as characterised by its food insecurity status.

In terms of their impact on food security, price policies can have mixed effects, as discussed above, depending on whether the food insecure people are mainly net producers or net consumers of food given the often high budgetary outlays required to reconcile different interests. Policy measures that promote productivity improvements with no detrimental effect on consumers are therefore likely to be preferred. Subsidies on inputs, if targeted to specific crops, have the potential to be administratively less costly but may be distortive of resource use. Such distortions however may be weighed against the benefits from increasing the supply of a crop which contributes substantially to food security. Interventions to correct for market failures appear to provide low cost opportunities for enhancing household and national level food security in both the short and longer term, particularly when removing distortions that create negative incentives to production. Border measures and market price support are likely to be relatively inequitable in that trade policy favours marketed commodities and therefore better off farmers. Subsidies on non-tradables and on inputs have a more equitable, and micro level impact on food security.

In summary, measures used to strengthen institutions governing access to inputs, which may be associated with the provision of input subsidies, are likely to provide the most cost effective, and least distortionary way of enhancing food security. Policies implemented to support the production of domestic food staples are likely to be preferable to those focusing on exportables. Where required, policy measures which provide enhanced incentives to producers via the output price are likely to be more effectively implemented via border measures than by subsidising output price which is more complex to administer. However the greater impact of the former on consumer prices may limit their use unless offset by targeted consumption subsidies. A well-judged mix of these measures may be the most appropriate approach to achieve the best result in terms of efficiency, effectiveness, cost and equity.

5 Increasing policy flexibility of the developing countries

The preceding analysis develops a prima facie case for the wider use of policies to promote developing country agriculture with the objective of enhancing their food security status. However, can this be compatible with a renegotiated AoA?

A number of recent proposals from developed countries have called for a tightening of exemption criteria. The US calls for simple differentiation of support into market distorting and non-distorting groups and the advancement of criteria for exempt support measures to ensure that they are targeted, transparent and non-trade distorting¹⁶. Norway ¹⁷ suggests that policies included in the AMS calculation be divided into two categories (i) consisting of domestic support to production for the domestic market which would be subject to less stringent reduction commitments and (ii) AMS support to export-oriented production which should be subject to further reductions. By contrast, most developing countries, notably India¹⁸, are currently calling for exemptions that are more responsive to specific developing country needs.

Although a categorisation of measures along the lines proposed by USA or Norway may provide more clarity and less scope for violation within existing AoA mechanisms, a case can be made for a more flexible mechanism to be available to developing countries that recognises fundamental differences in their food security objective. Recognizing that not all developing countries can be said to be food insecure, while all developing countries can be presumed to need to foster their rural development, two different types of policy response at the WTO negotiations may be considered.

(a) For food insecure developing countries, the suggestion would be to grant to them the same exemptions as applicable to LDCs, allowing them to increase their AMS for commodities critical to food security, unless this leads to a share of the world market in any of the commodities above a certain level along the lines of Article 27 of the Agreement on Subsidies and Countervailing Measures.

(b) For all other developing countries, the suggestion would be to raise the de minimis level (perhaps limited to commodities critical to food security); extending input and investment subsidies to all farmers producing commodities critical to food security; and either re-negotiate tariff bindings for food crops without making corresponding concessions elsewhere or support a Special Safeguard Clause for food commodities.

¹ Based on a longer paper prepared by Richard Pearce and Jamie Morrison.

² OECD (2000). Issues at Stake in Agriculture for Emerging and Transition Economies in the Multilateral Trade Negotiations. COM/AGR/APM/TD/WP(2000)24. Paris, OECD

³ FAO (1999). Synthesis of Country Case Studies. FAO Symposium on Agriculture, Trade and Food Security: Issues and Options in the Forthcoming WTO Negotiations from the Perspective of Developing Countries, Geneva

⁴ Kydd, J., Dorward, A., Morrison, J.A. and G.Cadisch (2001) The Role of Agriculture in Pro Poor Economic Growth in Sub Saharan Africa. Paper prepared for DFID

⁵ The ability to pursue rural development objectives as a way of enhancing food security is a central theme of many recent proposals. The Indian proposal calls for additional flexibility for providing subsidies to farm inputs “wherein productivity levels are below the world average”. Further, they suggest that “measures taken by developing country members for alleviation of poverty, rural development, rural employment and diversification of agriculture should be exempt from any reduction commitments”. Similarly, Cuba and others propose “supports for improving competitiveness and expanding domestic production capacity of developing countries”. In calling for the creation of a “Development Box” the proposal by Cuba and others suggests exemptions for measures that protect and enhance developing countries' domestic food production capacity particularly in key staples.

⁶ FAO (2000), the State of Food and Agriculture: Lessons from the Past 50 Years, FAO, Rome, 2000.

⁷ Indeed, there is a large difference between applied and bound tariff rates in developing countries. See for example WTO (2000) Committee on Agriculture (Regular Meetings) General Council Overview of WTO Activities . G/L/417. Geneva p52

⁸ It has been shown that countries need to increase foreign exchange earnings by more than 1% to pay for 1% increase in food imports. See, for example, Food Security Assessment, USDA Economic Research Service. Situation and Outlook series GFA-11 Washington DC, 1999.

⁹ Morocco for example, has experienced a problem with AMS commitments over the use of a storage subsidy to cope with good harvests which may have been alleviated by recourse to export subsidies

¹⁰ Pearce R (1997) Incentive policies for domestic small-scale agricultural production. In: Konandreas, Lindland, Pearce and Wilkin (eds) The Uruguay Round and Agriculture in Southern Africa: Implications and Policy Responses. FAO, Rome

¹¹ FAO 2000 p106 op cit

¹² For a full review see Dorward, A. R, Kydd, J and C. Poulton (1998) Smallholder Cash Crop Production under Market Liberalisation: A New Institutional Economics Perspective. Wallingford, CAB International: 56-112.

¹³ Dorward and Morrison (2000) op cit

¹⁴ Reutlinger, S. (1987) The nutritional impact of agricultural projects. In Gittinger, J.P., Leslie, J and C. Hoisington (eds)(1987) Food Policy: Integrating supply, distribution and consumption. EDI series in Economic Development. Johns Hopkins Press World Bank, Washington DC

¹⁵ See for example i) Diaz-Bonilla, E, Thomas, E., Robinson, S. and A. Cattaneo (2000) Food Security and Trade Negotiations in The World Trade Organization: A Cluster Analysis of Country Groups TMD Discussion Paper No. 59 Washington, D.C.; and ii) Valdes, A and A McCalla (1999). Issues, Interests and Options of Developing Countries, paper delivered at conference on Agriculture and the New Trade Agenda from a Development Perspective: Interests and Options in the WTO, 2000 Negotiations" Geneva, Switzerland

¹⁶ WTO (2000) Statement by the United States G/AG/NG/W/32

¹⁷ WTO (2001) Statements by Norway G/AG/NG/W/182

¹⁸ WTO (2001) Statement by India G/AG/NG/W/114