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WASHINGTON, January 10, 2005— With almost 70 percent of the poor people in developing countries living in rural areas, agricultural sector reforms - in particular global trade liberalization - will be crucial in giving them opportunities for better lives, according to a new World Bank report released today.
The report, Global Agricultural Trade and Developing Countries, edited by M. Ataman Aksoy and John C. Beghin, notes that despite the recent framework agreement in Geneva, agricultural protection continues to be among the most contentious issues in global trade negotiations. High protection of agriculture in industrial countries was the main cause of the breakdown of the Cancún Ministerial Meetings in 2003, and remains among the key outstanding issues in the Doha Round of global trade negotiations.
Developing countries are investing to increase their agricultural productivity, but these gains will not be fully translated into poverty reduction unless industrial and some middle-income countries reduce agricultural trade protection, the report says. In the absence of reduced protection in these countries, increased productivity in agriculture will instead give rise to overproduction and price declines for many commodities, undermining competitive poor countries' efforts to expand exports and rural incomes. It also increases pressure for greater protection globally.
Identifying superior policy options is not difficult, the report states, but the feasibility of reform depends on the power of vested interests, and the ability of governments to identify efficient tradeoffs among multiple goals -such as food security, income transfers, and expansion of higher-value products in agriculture.
"Manufacturing protection has declined worldwide following substantial reforms of trade policies, especially in developing countries. Yet many industrial and developing countries still protect agriculture at high levels, which is hitting the world's poor the hardest," said François Bourguignon, the World Bank's Senior Vice President and Chief Economist. "Growth in agriculture has a disproportionately positive effect on poverty reduction, because more than half the population in developing countries lives in rural areas, and poverty is highest in rural areas. This report clearly shows the need for coordinated, global trade reforms if we are to help the rural poor."
Many developing countries reform, while industrial country protections remain high
While protection remains high in industrial countries, many developing countries have liberalized their agricultural sectors. Average agricultural tariffs, the main source of protection in developing countries, declined from 30 percent to 18 percent during the 1990s but are still higher than manufacturing tariffs.
In addition, many of these countries eliminated other forms of import restrictions, abandoning multiple exchange rate systems that penalized agriculture, and eliminating almost all export taxes. However, "reactive protection" in response to industrial-country support to agricultural producers began to increase in many middle-income countries, especially in food products.
The report notes that low-income countries have seen increased agricultural trade surpluses in their trade with both middle-income developing countries and industrial countries. But low-income developing countries now export more to middle-income countries than they do to the European Union, their largest export market in the early 1980s, and the agricultural trade surpluses of middle-income countries have diminished. Among industrial countries, Japan has the largest agricultural trade deficit (almost $50 billion in 2000–01); the European Union, once the largest net buyer of agricultural commodities, has seen its deficits decline; and NAFTA members' trade surplus with the rest of the world has shrunk considerably.
Projections in the report indicate that without significant reforms, the agricultural trade surpluses of industrial countries will increase while the developing countries will face increasing agricultural trade deficits, exacerbating rural poverty.
Potential winners and losers from agriculture trade reforms
The report identifies both the key policy instruments that distort competition and likely winners and losers from global reforms, including producers, consumers, and taxpayers within and across countries. Knowing who is likely to gain or lose from a given reform is critical for sequencing reforms and putting in place complementary policies, including assistance to reduce the cost of adjustment in noncompetitive sectors.
The report concludes that reform would reduce rural poverty in developing economies, both because, in the aggregate, they have a strong comparative advantage in agriculture and because the agricultural sector is important for income generation in these countries. Also, liberalization of value-added activities is crucial for expanding employment and income opportunities beyond the farm gate.
Implementation of reforms is critical
How reforms occur will have important consequences for developing countries, the report says, noting that the best approach is coordinated global liberalization of policies. The report illustrates the importance of a multi-commodity approach to reform, as gains and losses do differ greatly by market. This approach would also allow the countries to trade off gains in some commodities against the losses in others. For example, world sugar price increases alone would offset about half the lost quota rents, or about $450 million, for countries with preferential access. The analysis shows that losses in rents would be much less than is commonly expected, as high production costs eat up much of the potential benefit from preferential access to the high-price markets.
Consumers in highly-protected markets will benefit greatly from trade liberalization as domestic (tariff-inclusive) prices fall and product choice expands. Consumers in poor, net-food-importing countries could face higher prices if these markets were not protected before liberalization, because of higher import unit costs. In practice, however, such concerns have often been exaggerated.
For example, dairy consumption in the Middle East and North Africa would be little affected by trade liberalization because, while world prices would rise, high import tariffs would be removed, so that the net impact on dairy consumer prices would be negligible. Similarly, rice prices will decline for consumers in most rice importing developing countries in Asia and Africa.
Commodity-by-commodity analysis reveals distortions
The report breaks new ground in providing a comprehensive analysis of individual commodities – sugar, dairy, rice, wheat, groundnuts, fruits and vegetables, cotton, seafood and coffee – providing specific examples of how large trade distortions impede trade flows, depress world prices, and discourage market entry or delay exit by noncompetitive producers. These commodity studies also show that reforms will lead to large gains, confirming the results of global models.
The report finds that border barriers are high in most of the commodity markets studied (the exceptions are cotton, coffee, and seafood), including industrial and many developing countries. For example, the global trade-weighted average tariff for all types of rice is 43 percent and reaches 217 percent for Japonica rice. Many Asian countries remain bastions of protectionism in their agricultural and food markets.
Subsidies have similar effects, depressing world prices and inhibiting entry by inducing surplus production by noncompetitive, and often large producers. Cotton subsidies in the United States and European Union, for example, have reached $4.4 billion in a $20 billion market. In dairy and sugar markets, the effects of export subsidies have been smaller than those of tariffs and tariff rate quota schemes, partly because of the export subsidy disciplines introduced in the Uruguay Round Agreement on Agriculture.
Domestic support and protection policies have substantial negative effects on producers in developing countries, because of the sheer size of the subsidies relative to the size of the market. Such large support programs shield non-competitive producers, and penalize efficient producers, often in poor countries.