Distortions to global ag & nonag markets: what needs explaining?

Kym AndersonUniversity of Adelaide and CEPR

13th Annual Conference on Global Economic AnalysisPenang, Malaysia, 9-11 June 2010

Financial assistance from the World Bank Trust Funds, particularly from DfID and BNPP, plus the ARC, 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. Project details are at www.worldbank.org/agdistortions

OutlineEvidence: trends and fluctuations in agric trade-related policies pre- and post-1980s

Based on recent price distortions database at

What next, in terms of:Further research on political economy of distortions to agric vs nonag incentives Implications for sectoral and economy-wide baseline model projections: what are prospective trade and agric price policy trends?

New evidence: what needs explaining (1)

Traditionally, HICs have supported, and DCs taxed, agric relative to manufNominal and relative rates of assistance to farmers, in both HICs and DCs, have grown with econ devt

But some reform evident for HICs since 1980s

Cross-country dispersion in RRA, 2000-04

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-10

40

90

140

Zim

babw

eC

ote

d 'iv

oire

Tanz

ania

Nig

eria

Zam

bia

Eth

iopi

aA

rgen

tina

Sen

egal

Ban

glad

esh

Ukr

aine

Egy

ptP

akis

tan

Sri

Lank

aN

icar

agua

Mad

agas

car

Thai

land

Cam

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outh

Afri

caB

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ew Z

eala

ndA

ustra

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omin

ican

Bra

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Uga

nda

Vie

tnam

Mal

aysi

aC

hina

Chi

leS

udan

Ecu

ador

Pol

and

Mex

ico

Ken

yaG

hana

Indo

nesi

aR

ussi

aS

lova

kia

US

Can

ada

Indi

aM

ozam

biqu

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hilip

pine

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rkey

Col

ombi

aC

zech

Rep

Hun

gary

Spa

inFr

ance

Lith

uani

aP

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gal

Italy

Den

mar

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tvia

Ger

man

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nlan

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en UK

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tria

Net

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Rom

ania

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Nor

way

Sw

itzer

land

Kor

ea

NRAagric for HICs and DCs, 1955-2004

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0

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1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

perc

ent

HIC & ECA HIC & ECA, incl. decoupled payments Developing countries

Evolution of average RRA for all DCs, 1965-2004: from very negative to slightly positive

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0

20

40

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1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

percen

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NRA non-ag tradables NRA ag tradables RRA

New evidence: what needs explaining (2)

Relative assistance to farmers:Is convergence towards zero (or small +ve) intersectoral distortions permanent, or just an abberation?

Will DCs move, like HICs did, to protecting agric as their incomes rise?

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0R

elat

ive

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e of

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ista

nce

(%)

-1 0 1 2 3Ln real GDP per capita

HIC RRA obs HIC fitted valuesDC RRA obs DC fitted values

New evidence: what needs explaining (3)

Reforms since 1980s: decoupling of some HIC agric support, removal of DC agric taxation

Halving of global welfare & trade effects• according to global CGE, and partial TRI measures

Agric policies’ trade reduction indexes: DCs, HICs and ETEs, 1960-64 to 2005-07, %

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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

Agric policies’ welfare reduction indexes: DCs, HICs and ETEs, 1960-64 to 2005-07, %

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

New evidence: what needs explaining (4)

Assistance within a sector varies a lot across industries

Which is why TRI and WRI (in previous two slides) are still a long way from zero

Assistance within agric sector has astrong anti-trade bias

NRAs by product: DCs versus HICs

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Cotton

Coconut

Beef

Soybean

Coffee

Pigmeat

Maize

Wheat

Poultry

Rice

Milk

Sugar

2000-04

1980-84

-150 -50 50 150 250

Rapeseed

Barley

Wheat

Maize

Soybean

Pigmeat

Cotton

Poultry

Beef

Milk

Sugar

Rice

2000-04

1980-84

387

Global WRI and TRI, by product, 2000-04

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GWRI GTRI

Anti-trade bias in DCs: NRA agric export taxation disappearing, but NRA ag import-competing is >0 & growing

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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

In HICs: export support >0, but fallen after 1980s

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10

30

50

70

90

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

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30

40

50

60

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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

New evidence: what needs explaining (5)

Trade measures are used, even though main purpose seems to be to achieve non-trade objectives

regardless of stage of econ devt, at least until the recent decoupling of some agric support in HICs

Border measures still the most impt. instruments for global WRI

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40

50

60

70

80

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1960‐64 1970‐74 1980‐84 1990‐94 2000‐04

Border measures Consumption tax Consumption subsidyProduction tax Production subsidy Input subsidies

‘Decoupled’ and NPS now more important to WRI in high-income countries

New evidence: what needs explaining (6)

Relative importance of different trade measures alters during spikes up or down in international food prices

Reflected in WRI, and also in negative correlation between NRA and int’l food price

Suggests govts. support the group who would be hurt most at such times

Freund and Ozden, “Trade Policy and Loss Aversion”, Amer Econ Review , Sept 2008

Earlier importance of export taxes for DCs: WRI for border measures

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10

20

30

40

50

60

1960 1965 1970 1975 1980 1985 1990 1995 2000

Export tax Import tax Import subsidy Export subsidy

Rice NRA (%) and int’l price, 1970-2005(a) South Asia (b) Sub-Saharan Africa

New evidence: what needs explaining (7)

Assistance to agric varies a lot across countries even with the same per capita income

See dispersion around trend in next figure

Suggests importance of differences in political institutions, such as constitution?

Will DCs move, like HICs did, to protecting agric as their incomes rise?

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010

020

030

040

0R

elat

ive

Rat

e of

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ista

nce

(%)

-1 0 1 2 3Ln real GDP per capita

HIC RRA obs HIC fitted valuesDC RRA obs DC fitted values

A forthcoming book begins to address such questions

The above and related facts needing explanation are laid out in Ch 2 of:

Anderson, K. (ed.), The Political Economy of Agricultural Price Distortions , New York: Cambridge University Press, Sept 2010

Rest of book covers: Recent devts in theory of pol econAnalytical narratives of ag protection growth since Corn LawsPolitical e’metrics using the NRA/RRA database

E’metics using agric NRA database:Olper and Raimondi (2010)

Transition to democracy raises NRA, but more so for:

permanent vs temporary democracyproportional vs majoritarian democracy• Exacerbated by parliamentary systems, but

dampened under presidential system

E’metics using agric RRA database: Bates and Block (2010) on SSAfrica

Negative RRAs, and NRAs for ag exporters, have moderated, but persist even though farmers comprise a political majorityThree factors matter: institutions, regional inequality, and the need to generate tax revenue. They find that:

In the absence of electoral party competition, agricultural taxation increases with the share of the population that is ruralIn the presence of party competition, the lobbying disadvantage of the rural majority turns into political advantagePrivileged cash crop regions are targets for redistributive taxation

• unless the country's president comes from a cash cropping region

Governments of resource-rich African countries, while continuing to tax export producers, tend to tax their food consumers less than in other African countries

Implications for ag trade research agenda

More analysis needed of causes of govt interventions

Political econometrics to explain differences – across countries, products and instruments – in NRA trends, fluctuations & turning points

Should modelers use insights from those analyses when generating a projection baseline (eg for climate change analysis), instead of simply assuming current policies continue into the future?

Thanks!

For all Agric Distortions Research Project working papers, regional and poverty e-books, and global distortions database, go to

Anderson, K. (ed), Distortions to Agricultural Incentives: A Global Perspective, 1955-2007 , London: Palgrave Macmillan and Washington DC: World Bank, Oct. 2009Anderson, K. (ed.), The Political Economy of Agricultural Price Distortions , New York: Cambridge University Press, forthcoming Sept 2010

kym.anderson@adelaide.edu.au