The Mirage of Farm Exports C. Rammanohar Reddy

A new orthodoxy has taken root in the international discourse on trade. According to this orthodoxy, if the advanced economies cut import duties, remove non-tariff barriers such as quotas or standards and stop protecting uncompetitive domestic producers, then there will be a phenomenal increase in the exports of the developing countries. When accompanied by trade liberalisation in the developing countries, the result will be a sea change in the size and structure of the exports of their economies. A couple of years ago, the World Bank, which was the first international institution to articulate this argument, projected that such changes would, by 2015, see the developing countries increase their incomes by $1.5 trillion and 320 million people would climb out of poverty.

The new orthodoxy is sophisticated in that it turns the spotlight on the unfair practices of the advanced economies and calls for a change in the “rigged” rules of world trade. This is quite different from the earlier approach of the international institutions, which had as its premise autonomous trade liberalisation by the developing countries. More sophisticated the new arguments may be, but how valid are they? The answer is best provided by an assessment of what will happen to the agricultural exports of the developing economies. The new orthodoxy sees enormous benefits for the poor countries if the barriers in the world markets to their exports of manufactures, services and agricultural products are removed. But the barriers are most evident in agriculture and it is this sector that is expected to yield the largest gains from the creation of a more fair and transparent policy regime in the advanced economies, in particular in the European Union, Japan and the United States. The striking comparisons offered in the 2003 edition of the UNDP Human Development Report illustrates the scale of farm subsidies in the rich countries. The $2,700 of annual subsidy received by every cow in Japan is nearly 2,000 times the $1.47 of aid Japan provides to each citizen of sub-Saharan Africa. The U.S. provides an average of $3.1 million of aid a day to the countries of sub-Saharan Africa but it gives the daily equivalent of $10.7 million as domestic support to its cotton growers. And the $311 billion of agricultural subsidies that the OECD countries provide annually to their farmers is six times as much as the aid they give to all developing countries.

The logic of the arguments for dismantling the regime that protects agriculture in the E.U., Japan and the U.S. is impeccable. The huge support for agriculture in the advanced countries hurts developing countries in two ways. It makes their farm exports uncompetitive in the global market because it holds down world prices, often below the cost of production. The second destructive impact of the subsidies in the rich countries is that they facilitate a flooding of developing country markets with these products, in the process destroying domestic agriculture. Lowering rich country subsidies will aid developing country exports as well as restore agricultural production in countries now hurt by subsidised imports. But it would be a fair assessment to make that cutting domestic support and lowering customs duties on agriculture will not automatically benefit the developing countries as a whole.

First, global agricultural prices are far more volatile than industrial prices. So if the developing countries are pushed to engage the world market in agriculture, they will suffer all the ups and downs of this volatility. They have in some respects already experienced the negative effects of this volatility – in the form of a steady decline in the prices of all primary products since the 1980s. Of course, one can argue that in the absence of a large subsidy to agriculture in the advanced economies, world prices would not have fallen as they did in the 1990s. This is true, but it is also correct that whichever the agricultural commodity – whether it is cereals or natural raw materials – prices are always subject to extreme fluctuations. The bigger and more efficient countries can cope with this volatility, but not the smaller ones. The effects of an engagement with the world market will be doubly burdensome because the price for getting the OECD countries to cut their farm subsidies will be to reduce import duties on agricultural products in the developing countries.

Second, agricultural productivity varies enormously between the developing countries. So even if the subsidised producers in the rich countries vacate the global market, it will be the bigger and more productive producers who will take their place. For example, among the developed countries, Australia, Canada and New Zealand will gain substantially in the markets for cereals and dairy products. Among the middle-income developing countries, Argentina, Brazil, Malaysia and Thailand should benefit in cereals, meat and some natural raw materials. Agricultural productivity in all these countries is far higher than in most of the developing world, so any hopes that the poorer countries of Asia, Africa and South America will benefit from agricultural trade liberalisation will quickly be dashed.

The peculiarities in the global agricultural market and the wide differences in productivity do not mean that in all cases only a small group of countries in the developing world will benefit from an end to rich country subsidies to agriculture. In cotton, there is the well known example of high productivity and globally competitive production in west Africa (mainly Burkina Faso, Chad and Mali) being squeezed in the global market because of the $6 billion of subsidies granted by the U.S., the E.U. and to a certain extent China. Since cotton accounts for as much as 30 per cent of the exports of these countries and contributes to 10 per cent of their national income, they have much to gain if the subsidies in the developed countries are slashed.

It is also not the case that just because the gains from a dismantling of the subsidy regime in the rich countries will accrue to only some countries, these subsidy regimes should be left as they are. For decades, the developed countries have used their financial resources to prop up their agriculture and keep out imports from the developing countries. At the same time, they have pressured the poorer countries to open their markets to industrial products. This hypocrisy now stands exposed. But even as the developing countries push for a winding down of the mammoth amounts of domestic support that agriculture enjoys in the advanced economies, they should have no illusions about using agricultural exports as the route to prosperity.

India has decided, fortunately, not to buy the argument that there is a pot of gold waiting for the country if it is aggressive in demanding deep cuts in the agricultural subsidy in the OECD countries. There was earlier a strong body of opinion canvassing that India join the Cairns group of farm exporters (Australia, Canada, Brazil, Thailand, South Africa, New Zealand and other major agricultural producers) who have been pressing for both lower subsidies and import duties in the E.U., the U.S., and Japan. If India had allied with the Cairns group then it would be in the unhappy position of not being able to provide even a modicum of domestic support (because of the Government’s resource constraints) and yet having to agree to lower import duties. This would have only made Indian agriculture highly vulnerable to the swings in the global market.

There is nothing to suggest that Indian agricultural exports are very competitive in the world market. Exports of rice and wheat have gone up and down in recent years, mainly because they have been offered to exporters at subsidised prices. About the only area where India could, in theory, have some chance of making a major mark in the global market is fruits and vegetables, of which the country is now the largest producer. Here again, the expectations are based more on hunches than a detailed analysis of where Indian agriculture stands. It is more likely that Brazil, Malaysia and South Africa will be able to offer better prices than India. All told, India is better off not taking an aggressive position on agriculture in the Doha round of trade liberalisation talks at the WTO. The risks are too high and the promised gains too few to warrant a dramatic opening up of Indian agriculture to foreign competition.

It is not that there is little to gain from demanding lower subsidies and more open markets to agricultural products in the advanced economies. These demands have to be made. But lower subsidies and greater market access in the developed countries do not offer a certain route to a huge increase in agricultural exports by the developing countries.