Agricultural Trade Policies & Food Security Will Martin World Bank Washington DC 2 December, 2011 The views expressed in this presentation are those of the author only and not necessarily those of the World Bank
Road Map Why do high and volatile prices matter? Trade policy options for poor countries? The collective action problem Policy options
Why do high & volatile prices matter?
Food price volatility Shocks to output are a major source both of income instability to farmers and of price volatility Shocks to demand from — for instance — biofuels, may also contribute Globalization helps reduce price volatility by diversifying sources of supply
Impacts depend on stock levels If stocks are normal, adverse shocks can be absorbed by stock reduction Key problems arise when stocks are low ◦ Reducing demand in line with supply requires large increases in price Prices spend long periods in the doldrums punctuated by short but intense price spikes
Real wheat prices Source: USDA. Deflated using U.S. CPI
Impacts of food prices on the poor Poorest spend 75% of income on staple foods 3/4 of poor people are rural & earn most of their income from farming ◦ Poor farmers don‟t gain much from higher prices Many are net buyers of staple foods ◦ Little opportunity to increase output in response to higher prices Net impacts on poverty? ◦ Are the gains to poor net sellers outweighed by the losses to poor net buyers? 7
1000 100 200 300 400 500 600 700 800 900 Rice & wheat prices, $US 0 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 Wheat Rice
2010-11 price surge Especially June to December 2011 ◦ Wheat, maize, many other commodities But fortunately not rice Used detailed data on the extent of pass- through into domestic prices Data on 28 countries & 38 commodities Estimate that 44 million have been pushed below the $1.25/day poverty line ◦ 68 million entering poverty; 24m escaping 9
Poverty impacts by country, % pt 4 3 2 1 0 -1 -2
Trade policy options for poor countries
What should poor countries do? An attractive policy option is to: ◦ Restrict exports when world prices are high Lower tariffs or pay import subsidies if an importer Gouel & Jean show this can be welfare- improving for a small open economy ◦ Where food budget shares are high & policy makers are risk averse ◦ Where these conditions are not met, volatility is theoretically preferable ◦ Trade policy alone dominated by a combination of trade & storage policies
In practice Many countries are strongly countercyclical with their trade policies ◦ May also raise protection and/or pay export subsidies when prices slump Historically both industrial & developing countries have insulated in this way ◦ Although major exporters have learned that this reduces their perceived reliability as suppliers and encourages importers to protect ◦ Only WTO rules stopped rich countries using Variable Import Levies to export instability
South Asia Rice: Nominal rate of assistance vs World Price: Correlation: -0.754 600 30 20 500 10 0 400 -10 NRA % USD 300 -20 -30 200 -40 -50 100 -60 - -70 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Pw S Asia
Some simple principles Import tariff reductions more frequent than export restrictions ◦ A mirror image so why criticize export restrictions more than import tariff reductions? Export bans frequently used but export taxes almost always preferable ◦ Optimal price insulation likely to be partial ◦ Zero exports most unlikely to be optimal ◦ Export bans likely generate domestic price volatility ◦ Prospect of periods of very low domestic prices likely to reduce supply
The collective action problem
A collective action problem If everyone attempts to reduce the impact of world price increases The policy appears to be a success ◦ “Domestic prices rose less than world prices when prices surged” But it may be collectively completely ineffective ◦ The world price increases one for one with attempts to lower domestic prices
Export restrictions ES P w ES P w c P w b P d a ED 0
And lower import barriers ES P w P w ES P w P 0 ED ED 0 Q
Like the grandstand problem When everyone in a crowd stands up to get a better view ◦ No one does! But unilateral refusal to participate isn‟t a solution ◦ If I don‟t stand up, I get a terrible view! Unfortunately, insulation against staple food price changes can have more serious consequences ◦ Magnifies the volatility of international income transfers
Analyze price rises of 1973-4 & 2005-8 Use World Bank data on distortions to agricultural incentives ◦ Data for 75 countries ◦ Update to 2008 Assess the impacts of rising export barriers, declining import barriers, on world prices
Estimated impacts on world prices Impact of Δ Share due to Δ Protn Protn % % Rice 2005-8 46 45 Wheat 2005-8 28 30
Insulation in rich & poor countries 60 Developed countries 50 have traditionally used insulating policies 40 ◦ Very strongly in 72-4 & 30 84-86, 20 ◦ But much less in 06-08 10 Wheat HICs Wheat DCs 0 1972-74 1984-86 2005-08 WTO disciplines on -10 insulation? -20 ◦ eg ban on variable -30 levies? -40 -50
2008 surge, rice prices 250 Producer Price Asia Producer Price Africa Producer Price Latin America 200 International Reference Price 150 100 2006 2007 2008 2009 2010 50 0
2008 surge, wheat prices 250 Producer Price Asia Producer Price Africa Producer Price Latin America 200 International Reference Price 150 100 2006 2007 2008 2009 2010 50 0
Insulation policies Clearly, insulation policies are much less effective than they appear to individual countries ◦ Redistribute, rather than reduce, domestic price volatility For large countries, such as China, India and Vietnam, the effect is very direct ◦ Export restrictions raise world prices, reducing the effectiveness of the policy For all countries, the collective action problem remains
International policy options
Current WTO policies WTO bindings limit import tariffs ◦ Lower bindings mean less scope for tariff reductions ◦ Variable import levies banned in Uruguay Round ◦ Special Safeguards directly structured to insulate domestic prices Export disciplines are very weak ◦ Export taxes not disciplined at all ◦ GATT Article XI bans export quantitative restrictions Except in cases of food shortage
Questions for international policy How might cooperative policies improve on the current beggar-thy-neighbor regime? More information on stocks and policies Would restrictions on export barriers help increase the confidence of importers? ◦ Should food aid be exempted from export bans Should policies focus just on export barriers? ◦ Or include import barrier reductions? How might international disciplines on trade and storage policies work? ◦ Convert export restrictions to taxes? ◦ Aim to reduce the degree of insulation?
Conclusions Prices of staple foods prone to intense but short-lived price spikes ◦ Extremely costly for the poorest Optimal policy for an individual country likely to involve beggar-thy-neighbor policies like export restrictions & import subsidies But these policies collectively self-defeating A key challenge is designing new policy rules to deal with the collective-action problem
References Gouel , C. and Jean, S (2011) „Optimal food price stabilisation in a small open developing country‟ http://are.berkeley.edu/documents/seminar/Trade.pdf Ivanic, Martin and Zaman „Short run impacts of the 2010- 11 food price surge on poverty‟ Policy Research Working Paper 5633 Martin and Anderson, „Export restrictions and Price Insulation during Commodity Price Booms‟ Policy Research Working Paper 5645
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