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Trade and food security: the importance of agriculture and agricultural trade in developing countries

INTERNATIONAL TRADE can have a major impact on reducing hunger and poverty in developing countries. Participation in trade allows access to larger markets and opens up opportunities for specialization in production and economies of scale. This can be of special importance for developing countries, particularly for smaller ones where the limited size of domestic markets discourages full use of production potential.

At the same time, trade provides access to better and cheaper supplies (including food imports) and may stimulate flows of technology and investment. To the extent that international trade spurs broad-based economic growth, expanded participation in world markets can contribute to improvements in household food security.

But increased openness to international trade has its costs. It may gradually redistribute world production according to countries’ comparative advantage. Inevitably this means that in some countries certain industries may shrink, either absolutely or relative to others, as cheaper imports become available. The resulting changes in the production structure and reallocation of resources may have a negative impact on food security, at least in the short term. Unemployment may rise, some productive sectors in agriculture may decline, and the food system may become increasingly concentrated, shutting out small-scale farmers and firms.

Overall, countries that are more involved in trade tend to enjoy higher rates of economic growth. But growth rates diverge widely for countries with comparable levels of trade activity, highlighting the importance of other factors in determining economic performance. Such factors include natural resource endowments and the size, skills and training of the workforce, as well as policies and institutions.

Indeed, while there is broad agreement that openness to international trade is a fundamental component of a policy mix that can foster economic growth, it is also recognized that, on its own, openness to trade is unlikely to lead to major improvements in a country’s economic performance. Nor can it be a substitute for development policies specifically aimed at reducing poverty and hunger.

The critical role of agriculture

Agriculture and agricultural trade play a particularly important role in both the national economies and the food security of developing countries.

Throughout the developing world, agriculture accounts for around 9 percent of GDP and more than half of total employment. But its relative importance is far greater in those countries where hunger is most widespread. In countries where more than 34 percent of the population are undernourished, agriculture represents 30 percent of GDP, and nearly 70 percent of the people rely on agriculture for their livelihoods (see graphs).

Today, 75 percent of poor people live in rural areas, and increases in urban poverty tend to be fuelled by people migrating to the cities to escape rural deprivation. No sustainable reduction in poverty is possible without improving livelihoods in rural areas.

Economic growth originating in agriculture can have a particularly strong impact in reducing poverty and hunger. Increasing employment and incomes in agriculture stimulates demand for non-agricultural goods
and services, providing a boost to non-farm rural incomes as well. A recent study in five countries in sub-Saharan Africa showed that adding US$1.00 to farm incomes potentially increases total income – beyond the initial US$1.00 – by between US$0.96 and US$1.88.

The role of agricultural trade

Agriculture accounts for much of the trading activity of developing countries, particularly those that are most food-insecure. For the developing countries as a whole, agricultural products represent around 8 percent of both exports and total merchandise trade. But for the countries where hunger is most prevalent, the share rises to over 20 percent (see graph).

Furthermore, while dependence on agricultural trade has been declining throughout the developing world, it has remained high and relatively stable in the most food-insecure countries. In 1996–2000 the share of agriculture in total exports in countries where more than 34 percent of the population are undernourished amounted to 22 percent (see graph), only slightly below the 24–25 percent recorded in 1981– 1985.

The fact that agricultural trade represents such a large share of the trading activity of countries where hunger is widespread does not imply that agricultural trade contributes to food insecurity. These countries trade heavily in agricultural products because agriculture is the mainstay of their economies and they need to import food. But it is in the countries with the least hunger that agricultural trade looms largest in relation to the scale of their agricultural economies (see graph).

This reflects the fact that agriculture in these countries is more productive, more competitive and better integrated into world markets. And it suggests that more robust agricultural growth can contribute both to reduced hunger and to increased integration in international trade.

The curse of overspecialization – commodity dependence

Many developing countries rely on exports of a small number of agricultural commodities for a large share of their export revenues. In many cases, they even depend on one single commodity.

As many as 43 developing countries rely on a single agricultural commodity for more than 20 percent of their total export revenues and more than half their revenue from agricultural exports. Most of these countries are in sub-Saharan Africa or Latin America and the Caribbean, and depend on exports of coffee, bananas, cotton lint or cocoa beans. High dependence on one, or a few, export commodities leaves these countries extremely vulnerable to changing market conditions.

Over the past 20 years, real prices for these commodities have been highly volatile and have fallen significantly overall. Declines and fluctuations in export earnings have taken a toll on income, investment, employment and growth. The export performance of the 43 commodity-dependent countries has been significantly poorer than that of the rest of the developing countries, both for agricultural commodities and for total merchandise trade.


Trade and food security: does trade openness harm food security?

INCREASING INTEGRATION of international markets has stirred widespread concern that agricultural trade may jeopardize food security in developing countries. Although far from conclusive, analysis of available data suggests that, in general, engaging in agricultural trade is associated with less hunger, not more.

At a national level, the proportions of undernourished people and underweight children tend to be lower in countries where agricultural trade is large in proportion to agricultural production.

Further analysis suggests that poor access and integration with international markets limits the ability of countries where hunger is widespread to import enough food to compensate for shortfalls in domestic production. Countries where more than 15 percent of the population goes hungry spend more than twice as much of their export earnings to import food as more food-secure countries (see graph). But their poverty and limited trading activities constrict both their export earnings and their ability to buy more food on international markets.

As a result, despite spending more than 25 percent of their export earnings on food imports, food-insecure countries depend far more heavily on homegrown food. Countries where more than 15 percent of the population goes hungry import less than 10 percent of their food, compared to more than 25 percent in more food-secure countries. Their relative isolation from international trade appears to be more a measure of vulnerability than of self-sufficiency.

Analysis also shows, however, that levels of hunger and poverty differ widely among countries with very similar levels of agricultural trade. This suggests that the impact of agricultural trade on food security is mediated by a range of other factors, including markets, institutions and policies to combat hunger.

The critical role of markets, infrastructure and policies

If key markets are missing or do not function properly, shifts in relative prices will not lead to a shift of production, jobs and investment into their most efficient uses, as the theory of comparative advantage assumes. Similarly, lack of good roads, ports, telecommunications and marketing infrastructure can hamper a country’s ability to participate in and benefit from international trade (see graph).

Recent experience in Viet Nam offers evidence that increasing agricultural exports and integration into international markets can contribute both to economic growth and to reducing hunger, especially when combined with investments in infrastructure and policies that encourage agricultural and rural development (see box).

Where trade liberalization has not been accompanied by policy reforms and investments, on the other hand, the impact on food security has often been ambiguous or detrimental.

To cite one example, in the early 1990s Mozambique removed a ban on raw cashew exports that had been imposed to stem a fall in exports of processed nuts. About a million cashew farmers received higher prices for their products. But at least half the higher prices received for exports went not to farmers but to traders, and there was no revival in production in response to the higher prices. At the same time, Mozambican processing plants lost their assured access to raw cashews and closed down, putting 7 000 people out of work.

It is likely that cashew production failed to revive because, at the time, Mozambique, like many other African countries, liberalized prices alone without initiating other complementary policy reforms and investments. A price reform can be easily reversed. By contrast, investing in rural infrastructure, improving rural financial markets, and regulating the activities of traders are much harder to do and much harder to reverse.

The key to improving food security for poor farmers lies in ensuring that price reforms are accompanied by policies to ensure that market opportunities are both accessible and credible.

Identifying likely winners and losers

Dismantling trade restrictions is expected to provide long-term benefits as investment and jobs shift into sectors in which countries enjoy a comparative advantage. But the adjustment process may take time and many nations and households may suffer heavy costs.

The countries most likely to benefit from trade liberalization are those whose economies are already more advanced and better integrated into international markets. But other countries and regions will have difficulty overcoming physical and infrastructural handicaps, such as inadequate rainfall, long distances from the sea and poorly developed transportation and communication networks. They run the risk of being bypassed and finding themselves trapped in a vicious circle of disadvantage.

Within countries, agricultural trade policy reform may affect households very differently. Commercial farmers with the resources to respond to market opportunities should benefit as a result of higher commodity prices. For landless households, increased demand for rural labour, goods and services may increase incomes enough to offset the impact of higher food prices. Subsistence farmers, on the other hand, may be largely unaffected, but could face pressure from higher prices for land, water, fertilizer, seeds and other inputs.

Expanding the circle of winners and mitigating the impact on losers will require both domestic policies and international support, including appropriate flexibility under WTO rules, to spur new economic opportunities and investments in rural areas.

Viet Nam: agricultural trade fuels economic growth and food security

Viet Nam offers a striking example of the role agricultural trade can play in reducing poverty and food insecurity when carried out in tandem with policy reforms and investments in rural infrastructure and development. Between 1991 and 2001, Viet Nam’s economy grew at a rapid annual rate of 7 percent and the proportion of undernourished people was reduced from 27 percent to 19 percent. Over the same period agricultural output grew by 6 percent per year and agricultural exports grew even faster. After seeing agricultural exports and imports roughly in balance through the late 1980s, Viet Nam generated a large agricultural trade surplus in the 1990s.

The foundations for Viet Nam’s rapid agricultural growth were laid in 1986. An economic reform programme gave farmers control over land, allowed them to increase sales to the market and reduced agricultural taxation. Viet Nam’s exports also benefited from enhanced market access. On the other hand, Viet Nam was slower in removing its own domestic subsidies and border protection against imports.

An aggressive poverty eradication campaign that targeted investments in rural infrastructure also contributed to boosting agricultural production and reducing hunger (see page 22).

Trade and food security: issues of the Doha Round and beyond

MUCH OF THE DEBATE about globalization has been centred around the World Trade Organization and the impact of international trade agreements negotiated under its auspices. And much of the concern about food security has focused on the Agreement on Agriculture (AoA) negotiated as part of the Uruguay Round agreements signed in 1994. The AoA says little explicitly about developing countries’ concerns with food security. But its proclaimed goal of establishing “a fair and market-oriented agricultural trading system” by reducing tariffs and subsidies could have a significant impact on food production and security.

Liberalization of agricultural trade is expected to drive up prices for most agricultural commodities. This could have a negative impact on food security in some developing countries, as most are net importers of food. Prices are expected to rise more steeply for the food products that developing countries import than for the commodities they export.

Many developing countries are expected to benefit, however, from reductions in tariffs and subsidies in developed countries. Improved access to markets in the industrialized countries and reduced trade distortion should boost rural incomes and employment and stimulate production and supply from local agriculture, particularly of food for domestic markets.

Overall, however, the lion’s share of benefits from trade liberalization is expected to go to the developed countries themselves (see graph). That is because developed countries have applied tariffs and subsidies mainly to protect the temperate-zone commodities that they produce themselves. Developing countries that export “competing” commodities, such as rice, sugar and cotton, should benefit if those protections are reduced. But the least developed countries, very few of whom export temperate-zone or competing products, would generally be worse off. Developing countries are expected to benefit more from increased trade with each other than they do from improved access to markets in developed countries.

Tariffs and subsidies in developed countries

To date, both adherence to the AoA and its impact on food security have proven hard to measure. Agricultural tariffs remain high and complex for many products that developing countries export, including horticultural products, sugar, cereals, cotton, dairy products and meat. There is also a significant degree of tariff escalation (see box) on products processed from commodities for which many developing countries enjoy a comparative advantage, such as coffee, cocoa and oilseeds.

The AoA also included provisions to reduce price supports and subsidies that lead to overproduction in developed countries and depressed prices on world markets. But transfers to agriculture in developed countries have diminished slowly, if at all (see graph). In 2002, direct support to farmers added up to US$235 billion, almost 30 times the amount provided as aid for agricultural development in developing countries. Much of that sum subsidized the production of surpluses in commodities that many developing countries depend upon.

The United States, for example, handed out US$3.9 billion in subsidies to 25 000 cotton farmers in 2001–2002, an amount higher than the entire GDP of Burkina Faso, where more than 2 million people depend on cotton for their livelihood. Farmers in Burkina Faso and other West African countries can produce cotton at US$0.47 per kg, far below the US$1.61 it costs to produce a kilogram of cotton in the United States. But guaranteed subsidies have encouraged US cotton farmers to increase production, even as the price of cotton has collapsed, threatening the very existence of African farmers who survive by growing cotton for export. Similarly, the European Union (EU) subsidized sugar production by US$2.3 billion in 2002. The EU has become the world’s second largest sugar exporter, even though its production costs are more than double those in many developing countries.

In addition to subsidies for production, export subsidies remain high for many products, including meat, dairy products and cereals. Export subsidies distort competition on world markets and destabilize world prices and incomes. Depressed world prices create serious problems for poor farmers in developing countries who must compete in global and domestic markets with these low-priced commodities and lack safeguards against import surges (see box). Over the longer term, depressed commodity prices discourage investment in agriculture in developing countries. While consumers may benefit from low prices, rural livelihoods and the long-run sustainability of production are jeopardized.

Food security in the Doha Round

Non-trade issues like food security and rural development, which did not receive much attention in the Uruguay Round Agreement, have gained much more prominence in the ongoing Doha Round. At Doha, WTO members committed themselves both to reducing export subsidies and domestic support and to enabling “the developing countries to effectively take account of their development needs, including food security and rural development”.

How these commitments will translate into formal agreements remains hotly disputed. Many developing countries argue that the problems confronting their agricultural sectors bear little resemblance to the excessive subsidies and rising production surpluses of the developed countries. Rather, the vast majority of developing countries face problems of inadequate production and of support that falls short of what would be needed to raise agricultural productivity to levels that would meet their food needs and agricultural potential.

Draft proposals tabled in the current Doha Round include several measures intended to address the concerns of developing countries. On market access, one provision would allow developing countries to identify “special products” for which domestic production is critically important to food security and rural development. These products would be subject to lower tariff cuts. Another provision would establish a Special Safeguard Mechanism allowing developing countries to impose additional import duties under certain circumstances, such as to contain import surges.

While reaffirming their commitment to liberalizing trade, some WTO members have emphasized that food security, rural development and the environment cannot be addressed without maintaining and supporting domestic agricultural production. For that to happen, they argue, multilateral rules need to take into account each country’s specific conditions and ensure the continued existence of various types of agriculture, not only the most productive farms in high-potential areas.

Import surges disrupt production

Falling prices can lead to import surges that displace domestic production. Kenya, for example, had more than doubled production of processed milk between 1980 and 1990. But then imports of milk powder soared, increasing from 48 tonnes in 1990 to 2 500 tonnes in 1998. At the same time, domestic production of processed milk plummeted almost 70 percent. Kenya’s ability to diversify into processing was undermined and small producers bore the brunt of the decline in demand for fresh local milk.


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