Module 1 - Facilitating Efficient Adjustment to Liberalized Trade

Producers benefit from the emergence of profitable new production opportunities that arise when inappropriate subsidies and barriers to trade are reduced. Farm incomes can increase both from higher prices of traditional products and from diversification to new products that become profitable. Further, input costs can fall and access to new technologies can be improved when input markets are liberalized. Some producers whose governments heavily subsidize inputs may lose (via increased production costs), at least in the short run, but stand to benefit in the long run provided they have an underlying competitive advantage in some products. Exit strategies or permanent transfers may be necessary for those that do not.

Policy and Implementation Issues

Changing architecture of world trade. Although trade barriers in industrial countries are generally low, the remaining barriers are concentrated on agricultural products and labor-intensive manufactures in which developing countries have a comparative advantage. As agriculture has a larger tradable component than most sectors, the trade environment and trade policy strongly affect the agriculture sector. New multilateral trade negotiations were launched at the Fourth WTO Ministerial Conference, held in Doha in 2001, with the objective of significantly reducing all types of barriers to agricultural trade, including trade-distorting domestic support. For developing countries, the capacity to participate effectively in these negotiations must be increased so that they are fairly represented, and their interests and concerns relating to agricultural trade can be presented in global efforts to achieve meaningful progress in global trade policy reform.

Policy biases against agriculture. Despite protecting domestic producers, developing countries have in the past typically taxed their agricultural sectors, to some extent directly (for example, by taxes on exports or controlled food prices) but, even more so, indirectly, through trade barriers and macroeconomic policies that overvalued the exchange rate and turned the internal terms of trade against agriculture. Commodity and input markets have been characterized by heavy government interventions through centralized input procurement measures (government parastatals and marketing boards), input subsidies, quotas, taxes on exports of agricultural commodities, and various regulatory rules. These biases all reflect market and trade regimes that are far from “liberal,” in the sense that they are highly regulated, and their economic signals are distorted by direct and indirect public sector intervention.

Transitional issues. The resistance to policy changes presented by adversely affected groups in part reflects barriers to their exit from inefficient production systems as well as barriers to their participation in new opportunities as they emerge. Imperfectly functioning capital and labor markets, inadequate public services, poor infrastructure, and research and extension systems that are biased toward traditional (protected) production systems, all limit the ability to transform farming systems and improve resource liquidity, including labor mobility. Poorer farmers may be among the most adversely affected. Older persons, those who are less educated, and those with human capital specific to farming are particularly affected. The public sector must promote the development of supporting institutions and infrastructure and of retraining programs for adjustment.