Distortions to Agricultural Incentives:A Global Perspective, 1955 to 2007

Kym AndersonUniversity of Adelaide and CEPR

Infoshop book launch and Rural Development Seminar, World Bank, Washington DC, 5 November 2008

Financial assistance from the World Bank Trust Funds, particularly from DfID and BNPP, plus in-knd support from IFPRI, are gratefully acknowledged, as are the contributions of the country case study authors and the Washington- and Adelaide-based teams. Views expressed are the authors’ alone and not

necessarily those of the World Bank or its Executive Directors, nor IFPRI. Research project details are at www.worldbank.org/agdistortions

What is this book about?The extent to which governments can’t resist distorting prices in agricultural marketsHow that intervention has evolved since 1950sWhy it mattersWhat alternative, more cost-effective measures are available to deal with food security, inequality and poverty

Agric policies: govts. can’t resistHaberler Report to GATT in 1958 warned of agric protection growth in high-income countries (HICs)

reducing market access opportunities for agric-exporting developing countries (DCs)

Meanwhile, newly independent DCs saw agric export taxes and multiple exchange rates as major sources of govt revenue to support their import-substituting industrialization strategy

further reducing incomes of the world’s poor (DC farmers)

When D. Gale Johnson published his 1973 book on World Agriculture in Disarray, he added that both sets of countries were insulating their domestic food markets

exacerbating international food price volatility and slowing global recovery to shocks

The early evidenceThe anti-agric and anti-trade policy biases of DCs were quantified for 1960-84 by the Krueger/Schiff/Valdes study of 18 developing countries

but not included were the 3 biggest (China, India, Indonesia)

The agric protection growth of HICs that Haberler feared was documented for WE and NE Asia for select years to early 1980s by Anderson, Hayami & others (1986)The assistance to farmers in HICs has been ably documented by OECD’s PSEs/CSEs since 1986, but there was no comparable set of numbers for DCs

The good news of the past 2 decades, after the Krueger/Schiff/Valdes study:

Many developing countries have undertaken major economic reforms since the 1980s

phased out their agric export taxes, reduced manuf protection, and allowed markets to determine the value of their currency

Some rich countries also have begun to reduce trade-distorting supports for their farmers

partly through policy re-instrumentation towards somewhat decoupled measures

Even so, there were believed to be many distortionary policies still in placeOne purpose of present study was to document more fully the extent of DC reforms

Conclusion: much achieved, but much reform still neededGlobal modeling results suggest the reforms since the early 1980s have taken the world at least halfway towards free goods marketsRemaining distortionary agric policies are responsible for 70% of the global welfare cost of 2004 merchandise trade distortions

even though agric is only 3% of global GDPThey are also responsible for much of the instability in int’l agric marketsThey appear to be net contributors to poverty in developing countries

What did this study involve?

90 consultants covered 75 countries (>90% of world agriculture, population and GDP)

Measured Nominal Rate of Assistance (NRA) for key farm products, covering 70% of production value

NRA = percentage by which domestic prices for farm products exceed those in international markets

Also generated a Relative Rate of Assistance (RRA) to producers of agric relative to non-agric tradable goods

Defined as RRA = [(1+NRAagt/100)(1+NRAnonagt/100)] – 1

Compiled in a global annual database (1955-2007), available at www.worldbank.org/agdistortions

Project’s focus countries: number and shares (%) of the global economy

No. of countrie

s

Pop’n share

AgGDP

share

GDP share

Africa 21 10 6 1Asia 12 51 37 10Latin America 8 8 8 5European TEs 14 7 67 4High-income 20 14 33 76WORLD TOTAL

75 90% 91% 96%

Global coverage of NRA estimates for 30 major agric products

Share (%)of global

ag productio

n

Share (%) of global

ag exports

Grains (10 products)

85 90

Oilseeds (6 products)

78 85

Tropical crops (7) 74 71Livestock products (7)

72 88

SUM OF ABOVE (30)

77 85

Two summary indicatorsInter-sectoral neutrality in assistance is least harmful to welfare (=> RRA=0)Intra-agric sectoral neutrality, at least in terms of equality of NRAs between agric exportables and agric import-competing sub-sectors, is least harmful to gains from agric trade and to ‘thinning’ int’l markets for agric goods (which adds to their instability)

Measured by a trade bias index (TBI), defined as TBI = [(1+NRAagx/100)/(1+NRAagm/100)] – 1

Evolution from negative to zero average relative rate of assistance (RRA) for all DCs

11

-60

-40

-20

0

20

40

60

80

100

1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

percent

NRA non-ag tradables NRA ag tradables RRA

RRA rise is steepest for Asia among the DC regions

-70

-60

-50

-40

-30

-20

-10

0

10

1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

perc

ent

Asia Africa LAC

Cross-country dispersion in RRA, 2000-04

-60

-10

40

90

140

Zim

babw

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'ivoi

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nzan

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eria

Zam

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Eth

iopi

aArg

entin

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Ban

glad

esh

Ukr

aine

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ptPak

ista

nSri

Lank

aNic

arag

uaM

adag

asca

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ndCam

eroo

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th A

frica

Bul

garia

New

Zea

land

Aus

tralia

Dom

inic

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Uga

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tnam

Mal

aysi

aChi

naChi

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ador

Pol

and

Mex

ico

Ken

yaG

hana

Indo

nesi

aRus

sia

Slo

vaki

a US

Can

ada

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biqu

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nes

Est

onia

Turk

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ance

Lith

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man

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Rom

ania

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way

Switz

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World’s RRAs and TBIs: 1980-84 vs 2000-04

Asia

Asia

Africa AfricaLAC

LACECA

WE

WE

NANA

Japan

Japan

ANZ

ANZ

-50

050

100

150

Rel

ativ

es R

ate

of A

ssis

tanc

e (%

)

-.4 0-0.6 -0.2 -0.1-0.2-0.3-0.5Trade Bias Index

RRATriangle: 1980-84, Circle: 2000-04

Anti-trade bias: in DCs, NRA ag export taxation disappearing, but NRA ag import-competing is >0 & growing

-50

-30

-10

10

30

50

1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

import-competing exportables total

Long-run trend in NRA ag import-competing goods is growing as fast in DCs as in HICs: a worry for WTO

0

10

20

30

40

50

60

70

80

1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

perc

ent

High-income countries Developing countries

How far have policy reforms reduced the disarray in world agricultural markets? PE

New partial equilibrium measures, based on J. Anderson/P. Neary’s Trade Restrictiveness theory but modified to account for difference between ag NRAs and CTEs (both of which can be positive or negative), are estimated for each of our 75 countries:

a Welfare Reduction Index (WRI), anda Trade Reduction Index (TRI)

We also estimate global WRI and TRI for each of our commodities

Welfare reduction index: DCs, HICs and ETEs, 1960 to 2007 (percent)

0

20

40

60

80

100

1960 - 64 1965 - 69 1970 - 74 1975 - 79 1980 - 84 1985 - 89 1990 - 94 1995 - 99 2000 - 04 2005 - 07

Developing countries Europe’s transition econs.

High - income countries

Trade reduction index: DCs, ETEs and HICs, 1960 to 2007 (percent)

-10

10

30

50

70

1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04 2005-07

Developing countries Europe’s transition econs. High-income countries

Global WRI & TRI (%), by product, 2000-04

-40

-20

0

20

40

60

80

100

120

140

160R

ice

Suga

rM

ilkB

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Poul

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Sorg

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GWRI GTRI

How far have policy reforms reduced the disarray in world agricultural markets? GENew global, economy-wide CGE modeling results on effects of distortions also suggest that, since the early 1980s, the world has gone more than half way towards fully liberalizing goods markets, in terms of welfare and trade effects of policies affecting goods marketsBut agric now account for 70% of the global welfare cost of goods-trade-distorting policies

even though agric and food account for only 3% of global GDP and 6% of global tradeReflecting in part the wide dispersion in agric NRAs not only between countries but also across products

Reform effects: retrospective since 1980-84, and prospectively as of 2004

Reform from 1980-84 to 2004

Move to free trade

as of 2004Global econ welfare, $b (%)

$233 (0.8%) $168b (0.6%)

DCs’ econ welfare, $b (%) $73b (1.0%) $65b (0.9%)DC share of global ag output

58% 62% 62% 65%

DC share of global ag exports

43% 55% 55% 64%

% rise in DC ag (nonag) sectoral value added

4.9%(0.4%) 5.6%(1.9%)

Insulation of food markets persists, so volatility of int’l food prices continues

Fluctuations around trend NRAag from year to year remain commonConsider the case of rice: insulating policies have ‘thinned’ its int’l market

<7% of global production is exported, versus 24% for wheatSo year-to-year coefficient of variation of int’l rice price is high: 0.63 compared with 0.44 for wheat

Rice NRA for South Asia is inversely correlated with int’l price

-

100

200

300

400

500

60019

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

USD

-70-60-50-40-30-20-100102030

NRA

%

Pw S Asia

… and also for Southeast Asia

-

100

200

300

400

500

60019

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

USD

-40

-30

-20

-10

0

10

20

30

NRA %

Pw (USD) SE Asia

True for non-rice products tooMost farm product NRAs tend to be negatively correlated with movements in international product price

On average, barely half of the change in an international price is transmitted to the domestic market within the first year, for the top dozen traded farm products

This is becoming a bigger issue as climate change adds to volatility of crop seasons

Some research questions still to be addressed

1. Political economy question: Will trend RRAs for HICs and DCs converge above zero, rather than at zero (where intersectoral distortion is zero)?

Will DCs move, like HICs did, to positive RRAs as their incomes rise?

-100

010

020

030

040

0

Rel

ativ

e R

ate

of A

ssis

tanc

e (%

)

-1 0 1 2 3Ln real GDP per capita

HIC RRA obs HIC fitted valuesDC RRA obs DC fitted values

Korea and Taiwan followed Japan …-5

00

5010

015

020

0R

RA

(%)

7 8 9 10Ln real GDP per capita

Japan Korea Taiwan

… so will China and India too, to avoid social unrest from widening urban-rural income gap?

-50

050

100

150

200

RR

A (%

)

7 8 9 10Ln real GDP per capita

China Japan Korea Taiwan India

Will growth in emerging economies continue to push up int’l food prices?

China’s impact so far has been much less on int’l prices for food than for minerals and energy

But partly because of rising RRA over the past 3 decades

True also of India, where Green Revolution also contributed to food self sufficiency after the 1960sNow with China’s and India’s RAAs close to zero, future agric import growth could accelerate if, on the one hand, they chose to not raise their RRA any moreOn the other hand, what if China and India (and other DCs) choose to follow Korea and Taiwan with agric protection growth?

which their WTO commitments would allow for some time yet, especially if Doha does not dramatically reduce tariff binding overhangs

What are the implications for WTO negotiations?

Need large cuts to bound tariffs and subsidies so as to reduce binding overhang & thus prospect of:

agric protection growth in DCs as their incomes rise, andNRA fluctuations around trend via variable trade barriers (because lib’n would ‘thicken’ int’l food markets)

Need to not only ban agric export subsidies but also discipline agric export restrictions at WTO?Proposed ‘Special Products’ and ‘Special Safeguard Mechanism’ would add to agric protection growth, to dispersion of NRAs, and to int’l food price volatility

What alternative policy initiatives would boost food security and reduce poverty?

Instead of variable trade measures, encourage governments to pour more of their support into boosting agric R&D, rural health & education, and rural infrastructure, and improving agric factor and product marketsPayoff from ag R&D investments has risen with higher prices & spectre of climate change

Hotter, drier, more volatile seasons adds to need for:• more-integrated global food markets so as to better

share the burden of fluctuating weather, and • efficient water markets

Thanks!For all Agric Distortions Research Project working papers and global distortions database, see www.worldbank.org/agdistortionsTwo forthcoming books are:Anderson, K., J. Cockburn and W. Martin (eds.), Agricultural Price Distortions, Inequality and Poverty Washington DC: World Bank, forthcoming March 2010Anderson, K. (ed.), The Political Economy of Agricultural Price Distortions , Cambridge and New York: Cambridge University Press, forthcoming late 2010