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Distortions to Agricultural Incentives: A Global Perspective, 1955 to 2007 . Kym Anderson University of Adelaide and CEPR Infoshop book launch and Rural Development Seminar, World Bank, Washington DC, 5 November 2008 - PowerPoint PPT Presentation
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Distortions to Agricultural Incentives:A Global Perspective, 1955 to 2007
Kym AndersonUniversity of Adelaide and CEPR
Infoshop book launch and Rural Development Seminar, World Bank, Washington DC, 5 November 2008
Financial assistance from the World Bank Trust Funds, particularly from DfID and BNPP, plus in-knd support from IFPRI, are gratefully acknowledged, as are the contributions of the country case study authors and the Washington- and Adelaide-based teams. Views expressed are the authors’ alone and not
necessarily those of the World Bank or its Executive Directors, nor IFPRI. Research project details are at www.worldbank.org/agdistortions
What is this book about?The extent to which governments can’t resist distorting prices in agricultural marketsHow that intervention has evolved since 1950sWhy it mattersWhat alternative, more cost-effective measures are available to deal with food security, inequality and poverty
Agric policies: govts. can’t resistHaberler Report to GATT in 1958 warned of agric protection growth in high-income countries (HICs)
reducing market access opportunities for agric-exporting developing countries (DCs)
Meanwhile, newly independent DCs saw agric export taxes and multiple exchange rates as major sources of govt revenue to support their import-substituting industrialization strategy
further reducing incomes of the world’s poor (DC farmers)
When D. Gale Johnson published his 1973 book on World Agriculture in Disarray, he added that both sets of countries were insulating their domestic food markets
exacerbating international food price volatility and slowing global recovery to shocks
The early evidenceThe anti-agric and anti-trade policy biases of DCs were quantified for 1960-84 by the Krueger/Schiff/Valdes study of 18 developing countries
but not included were the 3 biggest (China, India, Indonesia)
The agric protection growth of HICs that Haberler feared was documented for WE and NE Asia for select years to early 1980s by Anderson, Hayami & others (1986)The assistance to farmers in HICs has been ably documented by OECD’s PSEs/CSEs since 1986, but there was no comparable set of numbers for DCs
The good news of the past 2 decades, after the Krueger/Schiff/Valdes study:
Many developing countries have undertaken major economic reforms since the 1980s
phased out their agric export taxes, reduced manuf protection, and allowed markets to determine the value of their currency
Some rich countries also have begun to reduce trade-distorting supports for their farmers
partly through policy re-instrumentation towards somewhat decoupled measures
Even so, there were believed to be many distortionary policies still in placeOne purpose of present study was to document more fully the extent of DC reforms
Conclusion: much achieved, but much reform still neededGlobal modeling results suggest the reforms since the early 1980s have taken the world at least halfway towards free goods marketsRemaining distortionary agric policies are responsible for 70% of the global welfare cost of 2004 merchandise trade distortions
even though agric is only 3% of global GDPThey are also responsible for much of the instability in int’l agric marketsThey appear to be net contributors to poverty in developing countries
What did this study involve?
90 consultants covered 75 countries (>90% of world agriculture, population and GDP)
Measured Nominal Rate of Assistance (NRA) for key farm products, covering 70% of production value
NRA = percentage by which domestic prices for farm products exceed those in international markets
Also generated a Relative Rate of Assistance (RRA) to producers of agric relative to non-agric tradable goods
Defined as RRA = [(1+NRAagt/100)(1+NRAnonagt/100)] – 1
Compiled in a global annual database (1955-2007), available at www.worldbank.org/agdistortions
Project’s focus countries: number and shares (%) of the global economy
No. of countrie
s
Pop’n share
AgGDP
share
GDP share
Africa 21 10 6 1Asia 12 51 37 10Latin America 8 8 8 5European TEs 14 7 67 4High-income 20 14 33 76WORLD TOTAL
75 90% 91% 96%
Global coverage of NRA estimates for 30 major agric products
Share (%)of global
ag productio
n
Share (%) of global
ag exports
Grains (10 products)
85 90
Oilseeds (6 products)
78 85
Tropical crops (7) 74 71Livestock products (7)
72 88
SUM OF ABOVE (30)
77 85
Two summary indicatorsInter-sectoral neutrality in assistance is least harmful to welfare (=> RRA=0)Intra-agric sectoral neutrality, at least in terms of equality of NRAs between agric exportables and agric import-competing sub-sectors, is least harmful to gains from agric trade and to ‘thinning’ int’l markets for agric goods (which adds to their instability)
Measured by a trade bias index (TBI), defined as TBI = [(1+NRAagx/100)/(1+NRAagm/100)] – 1
Evolution from negative to zero average relative rate of assistance (RRA) for all DCs
11
-60
-40
-20
0
20
40
60
80
100
1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04
percent
NRA non-ag tradables NRA ag tradables RRA
RRA rise is steepest for Asia among the DC regions
-70
-60
-50
-40
-30
-20
-10
0
10
1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04
perc
ent
Asia Africa LAC
Cross-country dispersion in RRA, 2000-04
-60
-10
40
90
140
Zim
babw
eCot
e d
'ivoi
reTa
nzan
iaNig
eria
Zam
bia
Eth
iopi
aArg
entin
aSen
egal
Ban
glad
esh
Ukr
aine
Egy
ptPak
ista
nSri
Lank
aNic
arag
uaM
adag
asca
rTh
aila
ndCam
eroo
nSou
th A
frica
Bul
garia
New
Zea
land
Aus
tralia
Dom
inic
anBra
zil
Uga
nda
Vie
tnam
Mal
aysi
aChi
naChi
leSud
anEcu
ador
Pol
and
Mex
ico
Ken
yaG
hana
Indo
nesi
aRus
sia
Slo
vaki
a US
Can
ada
Indi
aM
ozam
biqu
ePhi
lippi
nes
Est
onia
Turk
eyCol
ombi
aCze
ch R
epHun
gary
Spa
inFr
ance
Lith
uani
aPor
tuga
lIta
lyDen
mar
kLa
tvia
Ger
man
yFi
nlan
dSwed
en UK
Aus
tria
Net
herla
nds
Rom
ania
Irela
ndTa
iwan
Slo
veni
aJa
pan
Nor
way
Switz
erla
nd Kor
ea
World’s RRAs and TBIs: 1980-84 vs 2000-04
Asia
Asia
Africa AfricaLAC
LACECA
WE
WE
NANA
Japan
Japan
ANZ
ANZ
-50
050
100
150
Rel
ativ
es R
ate
of A
ssis
tanc
e (%
)
-.4 0-0.6 -0.2 -0.1-0.2-0.3-0.5Trade Bias Index
RRATriangle: 1980-84, Circle: 2000-04
Anti-trade bias: in DCs, NRA ag export taxation disappearing, but NRA ag import-competing is >0 & growing
-50
-30
-10
10
30
50
1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04
import-competing exportables total
Long-run trend in NRA ag import-competing goods is growing as fast in DCs as in HICs: a worry for WTO
0
10
20
30
40
50
60
70
80
1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04
perc
ent
High-income countries Developing countries
How far have policy reforms reduced the disarray in world agricultural markets? PE
New partial equilibrium measures, based on J. Anderson/P. Neary’s Trade Restrictiveness theory but modified to account for difference between ag NRAs and CTEs (both of which can be positive or negative), are estimated for each of our 75 countries:
a Welfare Reduction Index (WRI), anda Trade Reduction Index (TRI)
We also estimate global WRI and TRI for each of our commodities
Welfare reduction index: DCs, HICs and ETEs, 1960 to 2007 (percent)
0
20
40
60
80
100
1960 - 64 1965 - 69 1970 - 74 1975 - 79 1980 - 84 1985 - 89 1990 - 94 1995 - 99 2000 - 04 2005 - 07
Developing countries Europe’s transition econs.
High - income countries
Trade reduction index: DCs, ETEs and HICs, 1960 to 2007 (percent)
-10
10
30
50
70
1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04 2005-07
Developing countries Europe’s transition econs. High-income countries
Global WRI & TRI (%), by product, 2000-04
-40
-20
0
20
40
60
80
100
120
140
160R
ice
Suga
rM
ilkB
eef
Poul
tryC
otto
nG
roun
dnut
Sorg
hum
Sesa
me
Coc
oaB
arle
yM
illet
Shee
pmea
tO
atTe
aPi
gmea
tEg
gR
apes
eed
Soyb
ean
Mai
zeW
heat
Sunf
low
erC
offe
ePa
lmoi
lC
ocon
utR
ubbe
rC
assa
vaW
ool
GWRI GTRI
How far have policy reforms reduced the disarray in world agricultural markets? GENew global, economy-wide CGE modeling results on effects of distortions also suggest that, since the early 1980s, the world has gone more than half way towards fully liberalizing goods markets, in terms of welfare and trade effects of policies affecting goods marketsBut agric now account for 70% of the global welfare cost of goods-trade-distorting policies
even though agric and food account for only 3% of global GDP and 6% of global tradeReflecting in part the wide dispersion in agric NRAs not only between countries but also across products
Reform effects: retrospective since 1980-84, and prospectively as of 2004
Reform from 1980-84 to 2004
Move to free trade
as of 2004Global econ welfare, $b (%)
$233 (0.8%) $168b (0.6%)
DCs’ econ welfare, $b (%) $73b (1.0%) $65b (0.9%)DC share of global ag output
58% 62% 62% 65%
DC share of global ag exports
43% 55% 55% 64%
% rise in DC ag (nonag) sectoral value added
4.9%(0.4%) 5.6%(1.9%)
Insulation of food markets persists, so volatility of int’l food prices continues
Fluctuations around trend NRAag from year to year remain commonConsider the case of rice: insulating policies have ‘thinned’ its int’l market
<7% of global production is exported, versus 24% for wheatSo year-to-year coefficient of variation of int’l rice price is high: 0.63 compared with 0.44 for wheat
Rice NRA for South Asia is inversely correlated with int’l price
-
100
200
300
400
500
60019
70
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
USD
-70-60-50-40-30-20-100102030
NRA
%
Pw S Asia
… and also for Southeast Asia
-
100
200
300
400
500
60019
70
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
USD
-40
-30
-20
-10
0
10
20
30
NRA %
Pw (USD) SE Asia
True for non-rice products tooMost farm product NRAs tend to be negatively correlated with movements in international product price
On average, barely half of the change in an international price is transmitted to the domestic market within the first year, for the top dozen traded farm products
This is becoming a bigger issue as climate change adds to volatility of crop seasons
Some research questions still to be addressed
1. Political economy question: Will trend RRAs for HICs and DCs converge above zero, rather than at zero (where intersectoral distortion is zero)?
Will DCs move, like HICs did, to positive RRAs as their incomes rise?
-100
010
020
030
040
0
Rel
ativ
e R
ate
of A
ssis
tanc
e (%
)
-1 0 1 2 3Ln real GDP per capita
HIC RRA obs HIC fitted valuesDC RRA obs DC fitted values
Korea and Taiwan followed Japan …-5
00
5010
015
020
0R
RA
(%)
7 8 9 10Ln real GDP per capita
Japan Korea Taiwan
… so will China and India too, to avoid social unrest from widening urban-rural income gap?
-50
050
100
150
200
RR
A (%
)
7 8 9 10Ln real GDP per capita
China Japan Korea Taiwan India
Will growth in emerging economies continue to push up int’l food prices?
China’s impact so far has been much less on int’l prices for food than for minerals and energy
But partly because of rising RRA over the past 3 decades
True also of India, where Green Revolution also contributed to food self sufficiency after the 1960sNow with China’s and India’s RAAs close to zero, future agric import growth could accelerate if, on the one hand, they chose to not raise their RRA any moreOn the other hand, what if China and India (and other DCs) choose to follow Korea and Taiwan with agric protection growth?
which their WTO commitments would allow for some time yet, especially if Doha does not dramatically reduce tariff binding overhangs
What are the implications for WTO negotiations?
Need large cuts to bound tariffs and subsidies so as to reduce binding overhang & thus prospect of:
agric protection growth in DCs as their incomes rise, andNRA fluctuations around trend via variable trade barriers (because lib’n would ‘thicken’ int’l food markets)
Need to not only ban agric export subsidies but also discipline agric export restrictions at WTO?Proposed ‘Special Products’ and ‘Special Safeguard Mechanism’ would add to agric protection growth, to dispersion of NRAs, and to int’l food price volatility
What alternative policy initiatives would boost food security and reduce poverty?
Instead of variable trade measures, encourage governments to pour more of their support into boosting agric R&D, rural health & education, and rural infrastructure, and improving agric factor and product marketsPayoff from ag R&D investments has risen with higher prices & spectre of climate change
Hotter, drier, more volatile seasons adds to need for:• more-integrated global food markets so as to better
share the burden of fluctuating weather, and • efficient water markets
Thanks!For all Agric Distortions Research Project working papers and global distortions database, see www.worldbank.org/agdistortionsTwo forthcoming books are:Anderson, K., J. Cockburn and W. Martin (eds.), Agricultural Price Distortions, Inequality and Poverty Washington DC: World Bank, forthcoming March 2010Anderson, K. (ed.), The Political Economy of Agricultural Price Distortions , Cambridge and New York: Cambridge University Press, forthcoming late 2010
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