[PPT] - Security Will Martin World Bank Washington DC 2 December, 2011 PowerPoint Presentation

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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

SLIDE 2

Road Map

 Why do high and volatile prices matter?  Trade policy options for poor countries?  The collective action problem  Policy options

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Why do high & volatile prices matter?

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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

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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

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Real wheat prices

Source: USDA. Deflated using U.S. CPI

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7

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?

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Rice & wheat prices, $US

100 200 300 400 500 600 700 800 900 1000 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 Rice Wheat

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9

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

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Poverty impacts by country, % pt

2
1

1 2 3 4

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Trade policy options for poor countries

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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

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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

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100

200 300 400 500 600

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 USD

70
60
50
40
30
20
10

10 20 30

NRA %

Pw S Asia

South Asia Rice: Nominal rate of assistance vs World Price: Correlation: -0.754

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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

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The collective action problem

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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

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Export restrictions

Pw Pw

ES ED

Pw

ES

Pd

a b c

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And lower import barriers

P0 Pw ES ED

Pw

ES ED Pw

Q

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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

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 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

Analyze price rises of 1973-4 & 2005-8

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Impact of Δ Protn Share due to Δ Protn % % Rice 2005-8

46 45

Wheat 2005-8

28 30

Estimated impacts on world prices

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Insulation in rich & poor countries

50
40
30
20
10

10 20 30 40 50 60 1972-74 1984-86 2005-08 Wheat HICs Wheat DCs

 Developed countries

have traditionally used insulating policies

Very strongly in 72-4 &

84-86,

But much less in 06-08

 WTO disciplines on

insulation?

eg ban on variable

levies?

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2008 surge, rice prices

50 100 150 200 250 2006 2007 2008 2009 2010 Producer Price Asia Producer Price Africa Producer Price Latin America International Reference Price

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2008 surge, wheat prices

50 100 150 200 250 2006 2007 2008 2009 2010 Producer Price Asia Producer Price Africa Producer Price Latin America International Reference Price

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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

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International policy options

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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

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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?

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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

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