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World Bank Chief Economist Urges Cuts in Rich Country Agricultural Subsidies

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MUNICH, November 19, 2002 – Recent decisions to delay the reform of Europe’s Common Agricultural Policy and to increase agricultural subsidies in the U.S. are egregious examples of rich countries opting to underwrite the status quo rather than using their wealth to support growth and facilitate development, according to World Bank Chief Economist Nicholas Stern.

“It is hypocritical to preach the advantages of trade and markets and then erect obstacles in precisely those markets in which developing countries have a comparative advantage,” Stern said. “That hypocrisy does not go unnoticed in developing countries. The recent Farm Bill in the United States and the recent agreement in Europe to delay the reform of the Common Agricultural Policy are deeply damaging.” 

Stern also discussed the need for policy reforms and stronger institutions in developing countries to increase trade, growth and poverty reduction. “Poor countries suffer from many internal impediments to trade, including bureaucratic red tape and harassment, weak infrastructure, malfunctioning credit markets, and legal and institutional inadequacies,” he said.  “And many developing countries have protective barriers which are still very high.” The World Bank is supporting developing countries’ efforts to address these problems, he said.

Stern made the remarks in a lecture at the Center for Economic Studies (CES) after being named “Distinguished CES Fellow 2002”. The fellowship was awarded by Prof. Hans-Werner Sinn on behalf of the CES Scientific Council in the Great Hall at the University of Munich. Prof. Sinn said that CES is honoring Stern’s contributions and achievements in the field of economics and “his lively engagement in international development.” 

The CES is an institute within the department of economics at the University of Munich dedicated to international academic exchange. The CES Scientific Council includes a number of renowned international economists.  In the first of three Munich Lectures in Economics that he will deliver, Stern argued that successful development rests on two pillars:  a climate that facilitates investment and  growth, and the empowerment of poor people so that they are able to participate in that growth.

While much of the speech was devoted to changes needed within developing  countries, Stern said that openness to trade was an important component of a good investment climate and that many barriers to expanding the trade are not within developing countries’ control. Recent U.S. and E.U. decisions to increase agricultural subsidies were “egregious examples, on the home turf of rich countries, of financing the costs of not changing, rather than supporting growth and facilitating development,” he said.

The World Bank is stepping up its assistance to developing countries’ trade-related activities and recently created an International Trade Department. Last year the Bank lent $1.2 billion for trade-related projects such as customs reform and improvements in trade financing and insurance mechanisms. The Bank also supports capacity building and trade facilitation through the Integrated Framework for Trade-Related Technical Assistance, which brings together the World Trade Organization (WTO), the World Bank, and other international agencies in support of developing countries’ own reform efforts.

Stern said that addressing developing countries behind-the-border constraints to trade is a key element of both development strategy and a priority for development assistance. Pro-development trade policies in the rich countries would complement these efforts, he said.

Negative Effects of Rich Country Agricultural Subsidies

Bank research has shown that agricultural subsidies in rich countries of about $300 billion a year suppress world prices, undermining developing country exports. The subsidies are roughly six times total development aid. A new Bank study found that full elimination of agricultural protection and production subsidies in the rich countries would increase global trade in agriculture by 17 percent, with agricultural and food exports from low and middle-income countries rising by 24 percent. As a result, total annual rural income in these countries would rise by about $60 billion, or roughly 6 percent.

“European subsidies and barriers are, in general, much higher than those in the United States,” Stern said. “Some of the results are bizarre.  We see sugar beets grown in Finland whilst poor sugar cane producers and cutters in the tropics struggle to make a living.” Stern said that the average European cow receives $2.50 per day in government subsidies and the average Japanese cow receives $7.50 in subsidies, while 75 percent of people in Africa live on less than $2 per day.

The negative effects of rich-country trade barriers and protective subsidies are not limited to developing countries, he said.  They waste rich countries’ financial resources; raise the domestic prices of food and clothing; and encourage environmental degradation, through increased use of capital-intensive farming that relies heavily on fertilizers and pesticides, he said.

U.S. subsidies to cotton growers alone will total $3.9 billion this year, three times U.S. foreign aid to Africa. The subsidies hurt poor farmers in North and West Africa, for whom cotton is the main cash crop.

Other barriers to developing country exports that Stern cited included protectionist anti-dumping actions, bureaucratic applications of safety and sanitation standards, and textile tariffs and quotas. According to research by the International Monetary Fund (IMF), protected textile markets in high-income countries cost developing an estimated 27 million jobs. “Every textile job in an industrialized country saved by these barriers costs about 35 jobs in these industries in low-income countries,” he said.

Escalating tariffs—duties that are lowest on unprocessed raw materials and rise sharply with each step of processing and value added—undermine manufacturing and employment in developing countries. A Chilean tomato exporter faces a U.S. tariff of 2.2% on fresh tomato exports but nearly 12% if they are processed into sauce.  Escalating tariffs help confine Ghana and Cote D’Ivoire to the export of unprocessed cocoa beans; Uganda and Kenya to the export of raw coffee beans; and Mali and Burkina Faso to the export of raw cotton. “These are taxes on development,” Stern said.

International Consensus for Action

Despite these obstacles, and the many problems within the developing countries, Stern said that the “optimism and good intentions of a new millennium” had helped to create an international consensus on the Millennium Development Goals (MDGs) adopted at the UN in the autumn of 2000. The goals represent specific targets for improvements in income poverty, health, education, the status of women and girls, the environment, and international development cooperation for the period from 1990 to 2015.

In Doha in November last year the international community agreed upon a new round of trade negotiations that placed the interests of developing countries at the top of the agenda.  In Monterrey, Mexico, last March, rich countries and developing countries reaffirmed their commitment to the MDGs.  And the Johannesburg Summit last August looked further ahead to address the challenges of achieving sustainable development and protecting the environment.

“Taken together with past achievements, and what we have learned about development policy, these commitments put us in a strong position to take action to achieve the Millennium Development Goals,” Stern said. 

The lectures will be compiled in a volume in the Munich Lectures in Economics series, published by the CES in conjunction with MIT Press. The award ceremony and the lecture are supported by Swiss Re Germany AG and are held in association with the Alumni Club of the department of economics.

Stern became Senior Vice President for Development Economics and Chief Economist of the World Bank in March 2000. From 1994 to 1999, he was Chief Economist at the European Bank for Reconstruction and Development. His academic career has included positions at the London School of Economics (LSE), the Massachusetts Institute of Technology, the Ecole Polytechnique in Paris, the Indian Statistical Institute in Bangalore and Delhi, and the People’s University of China in Beijing.  He has also served extensively as an economic advisor to businesses, governments and international institutions. 

For the full text of Nicholas Stern's speech, see
Dynamic Development: Innovation and Inclusion





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