This policy brief has been written in
the context of the demand of developing countries, including India, in
the on-going Doha round of WTO negotiations for policy space within which
protect the livelihood security of their small and marginal farmers. It
uses Mexican agriculture's integration experience under NAFTA to establish
that developing country demands are justified. It points out that despite
the gains Mexican agriculture has made under NAFTA, the very nature of
those gains meant that the brunt of adjustment was borne by small and
marginal farmers. This came about both because of the retrenchment of
the state and the nature of investment flows under NAFTA. Finally it suggests
an alternative agricultural modernisation model centered on small and
marginal farmers and maximisation of employment growth.
The paper is divided into three parts: Section I briefly introduces how
developing countries have sought to protect the interests of small and
marginal farmers in the on-going Doha round and the current state of play
in those negotiations. Section II discuses the integration of Mexican
agriculture in global markets under NAFTA and why the brunt of the adjustment
was borne by small and marginal farmers. And finally, Section III proposes
an alternate model of agricultural modernization centered on small-farmers
and why for developing countries the stakes are much higher than for Mexico.
I: Introduction - Special Products and the Special
Safeguard Mechanism
At the heart of addressing livelihood concerns of small farmers in developing
countries in the on-going Doha round of WTO negotiations is the designation
of Special Products (SPs) and Special Safeguard Mechanisms (SSM) in the
Agreement on Agriculture. Developing countries have argued that SPs -
products linked to food security and livelihood security - should either
be subject to no tariffs or small reductions. An SSM would allow a temporary
increase of relevant tariffs in response to a pre-specified increase in
import volumes or decline in price levels. In designing the use of both
these instruments the G33 and other developing country groupings in the
WTO have sought to amplify the policy space available to developing countries
in dealing with livelihood concerns while continuing to integrate into
the global economy.
The reason for framing livelihood issues in this manner is the understanding
that small and marginal farmers, at least in most developing countries
including India, lead an exceedingly precarious economic existence and
are not positioned to compete effectively in relatively open agricultural
markets, particularly given the levels of subsidies enjoyed by agricultural
producers in developed countries. Therefore, first, in a situation where
reasonable opportunities of migrating out of agriculture are limited even
in rapidly growing economies, forcing farmers off their land through import
competition is both economically and politically unsustainable. Second,
given the above, the flexibilities sought in the use of instruments have
to be put in the context of the seriously limited policy space available
to developing countries in helping small and marginal farmers cope with
import competition, given that direct production subsidies of various
sorts are WTO-illegal.
In this light, Crawford Falconer's new negotiating text for the Agreement
on Agriculture makes disappointing reading. By offering that the SSM be
activated if prices decline by 30% or more and far fewer SPs than the
G33 have asked for [1],
the text makes a mockery of livelihood concerns of small farmers that
is at the heart of the developing country and Indian position. Little
wonder then that India has said that the new text is "totally unacceptable"
[2].
More specifically, the G33 statement 26th May 2008 commenting on the draft
text says "that specific fundamental elements of SPs & SSM have
not been incorporated."[3]
Equally pointedly, the statement of the Small Vulnerable Economies Group
on the draft text notes, among other things, that as far as the SSM is
concerned, "lamentably the text is very far from reflecting a possible
agreement, because the dispositions contained therein turn it into a mechanism
without utility for the developing countries."[4]
II: Mexico - NAFTA and Agricultural Modernisation
For anybody who doubts that, without safeguards, the brunt of adjustment
costs of integrating relatively low-productivity agriculture into international
markets is borne by small and marginal farmers, a close look at Mexico's
post-NAFTA experience would be salutary. Even Felipe Calderon, Mexico's
President and an acolyte of neoliberal economics, has had to acknowledge
that Mexico, at least in part as a result of agriculture's integration
into global markets, is faced with an unprecedented agrarian crisis. At
a recent press conference in May when the German Chancellor Angela Merkel
was visiting Mexico, he said that high levels of subsidies available to
European and US farmers had a debilitating effect on the competitiveness
of Mexican farmers, resulting in a large number of his compatriots migrating
to the US "abandoning land, because it was simply impossible to compete
with subsidies in other countries"[5].
To be sure all of Mexican agriculture's current problems cannot be ascribed
to NAFTA. They go back at least to the early 1980s, when the "sowing
petroleum" strategy using oil revenues and public investment to
subsidise agricultural growth and achievement of food-security - collapsed
on the back of sharply declining oil prices and the subsequent debt crisis
of 1982 [6].
In the macroeconomic retrenchment that followed agriculture suffered sharp
cuts in public investment and subsidy levels. But it was Mexico's accession
into GATT in 1986 that made possible a new strategy based on global economic
integration.
As a result in 1989, during Carlos Salinas's presidency, a strategy of
agricultural 'modernization', centered around global integration, private
investment and markets, was put in place. Salinas amended the Mexican
Constitution to make it easier to buy and sell communally owned land,
substantially reduced the role of the state in rural economic activity
including the privatization of state-owned enterprises in distribution
and storage and moved relative prices in favour of agricultural exports.
This of course has to situated within the overall swing in Mexican economic
policy making that took place in the late 1980s towards market fundamentalism.
The hope was that secure property rights and a market-led economy would
ensure a private investment driven revival of agricultural growth in line
with comparative advantage[7].
NAFTA, which entered into force in 1994, essentially built on all of the
above institutional changes and sought to lock-in agricultural trade among
NAFTA partners in terms of comparative advantage. Vis-à-vis the
USA (and Canada), Mexico was at a comparative dis-advantage in grains
(corn, wheat, rice), oilseeds, cattle rearing and forestry. It has a comparative
advantage in fruits, vegetables sugar cane and coffee [8].
It was also felt that as a result of relatively backward and low-productivity
agriculture, the share of agriculture and allied sectors in its workforce
- in 1991 it accounted for 27% - was much larger than was warranted given
its level of development.
Comparative advantage driven modernization of agriculture therefore, it
was hoped, would also help shift labour towards higher productivity non-agrarian
occupations[9].
The hold of market fundamentalism was so strong among Mexico's business
and economic policy making elites that market driven comparative advantage
was an article of faith. There was very little discussion of the fact
that what is important for growth is not static but dynamic comparative
advantage. That markets left to themselves, do not automatically deliver
dynamic comparative advantage, which depends upon the evolution of institutions
and technological and learning capabilities. That successful development
experience is also the successful shaping of the evolution of dynamic
comparative advantage through purposive public policy[10].
Be that as it may, as a result of NAFTA therefore, in agriculture and
related trade, Mexico imports basic foodstuffs corn, wheat, rice, soya,
beef, pork, chicken meat, milk and exports tomatoes, peppers, fruits,
vegetables and beef cattle. Among agro-based products beer, tequila and
canned fruits and vegetables are important. Some of the outcomes that
designers of NAFTA had hoped for have come about. Agricultural exports
have grown three-fold since the agreement and Mexico's agricultural exports
are today much more diversified towards higher value products. And before
the current spike in the price of foodgrains, agricultural exports had
finally begun growing faster than imports, narrowing the agricultural
trade deficit. Equally importantly, there has been improvements in agricultural
productivity. As a result, some economists have argued that NAFTA has
been good for Mexican agriculture[11].
Despite these improvements, agriculture overall has not performed very
well. Not only has it, in the post-NAFTA period, grown slower then GDP,
but equally importantly, growth has decelerated as compared with the decade
earlier[12].
Whatever be the gains that have been achieved, and as we have seen, there
have been some, the very nature of these gains has adversely affected
small farmers. And the reasons are fairly straightforward[13].
12% of Mexico's arable land is devoted to agriculture and 54% to cattle
ranching. Of the cultivated land, 71% is devoted to grains and oilseeds
and only 9% to fruits and vegetables. Therefore the bulk of cultivated
area is adversely affected by import competition. 85% of Mexico's farmers
are small and marginal and grow largely grains and oilseeds. About 16%
of farmers grow fruits and vegetables and most of these are medium and
large farmers, largely because the investment required for growing fruits
and vegetables is beyond the reach of most small-farmers. Therefore it
is small farmers that have borne the brunt of import competition.
The vacuum created by retreat of the Mexican state from agriculture was
filled by large US and Mexican agribusiness. In the post-NAFTA period
the bulk of FDI in agricultural sector has been in the agri-business and
agro-processing rather than agriculture[14].
As a result a few large trans-national agribusiness firms, mostly US and
Mexican, dominate storage, flour milling, grain trading[15]
and meat processing. Put differently they dominate the intermediation
chain that takes crop or cattle and makes it a marketable commodity. Transnational
agribusiness has used this dominant position and a process of vertical
and horizontal integration to establish an overwhelming presence in the
market for wheat, rice, corn, soya, poultry, meat, pork and eggs. Transnational
agri-business tends to have much closer links with larger farmers and
producers, who have better access to land, irrigation and credit, all
of which are scarce commodities for small farmers[16],
particularly after the withdrawal of the state. And the little state assistance
that remains tends to inordinately favour larger farmers. Little wonder
then that it is the larger farmers that have taken advantage of global
integration and changing cropping patterns and now account for a larger
proportion of domestic markets.
Alongside this, as hoped for by designers of NAFTA, has been 'modernisation'
- a sharp decline in the share of agriculture and allied sectors in the
workforce. From nearly 27% in 1991 it declined to slightly less than 15%
in 2006, losing more than 2 million jobs[17].
Again small and marginal farmers and agricultural labour bore the brunt,
as evidenced by very sharp decline in the number of rural households.
According to a study by Jose Romero and Alicia Puyana carried out for
the federal government of Mexico, between 1992 and 2002, the number of
agricultural households fell an astounding 75% - from 2.3 million to 575,
000[18].
There has been a significant increase in migration out of rural areas
as livelihoods are lost and farms have been abandoned. The hope was that
this migration out of low-productivity agriculture would be absorbed into
higher-productivity non-agrarian urban employment. But anemic employment
growth in the post-NAFTA period, particularly in manufacturing[19],
put paid to that. And what little employment there has been has largely
been in the informal sector. As a result there has been a change in the
pattern of rural out-migration. In the 1980s the likelihood of migrating
to urban Mexico was higher than that of migrating to the USA. Today, as
a result of anemic employment growth, the likelihood of migrating to the
USA is significantly higher[20].
The World Bank estimates that between 2000-05, 400,000 Mexicans migrated
to the USA annually[21].
According to other estimates this number is closer to 500,000[22].
300,000 of these are from rural Mexico and again mostly small, marginal
farmers and agricultural labour[23].
To put this in context between 1994 and 2004, Mexico's labour force grew
by approximately 1 million annually[24].
So effectively today Mexico imports food from the USA and exports farmers
and agricultural labour.
Again to lay all the problems of Mexican agriculture at NAFTA's door would
be incorrect[25],
though few would disagree that it has been a contributing factor. The
problems facing Mexican agriculture are the result of systematic underinvestment
in agriculture from the early 1980s, way before NAFTA was signed[26].
But the reason why NAFTA complicates matters is because it is a multilateral
agreement that essentially protected rights of big capital (investor protection)
and enhanced its mobility (within North America)[27]
to the detriment of other factors. In agriculture, it essentially protected
the interests of large Mexican and US agri-business and adversely affected
the ability of small and marginal farmers in Mexico to cope with import
competition[28].
And this because their interests were not represented at the negotiating
table[29].
It had been hoped that NAFTA would lead to an increase in investment in
Mexican agriculture, but that did not materialize. A sector that accounts
for more than 5% of GDP accounts for less than 1% of its investment and
the underinvestment noted earlier has continued in the post-NAFTA period.
And what investment there has been, as we have seen, marginalized small
farmers even further by reducing their access to the intermediation chain
and therefore their ability to compete in the market.
It is not just the fact that Mexico's small and marginal farmers have
borne the brunt of the adjustment of Mexican agriculture's integration
into global markets. The spike in food prices in the last couple of years
has put enormous pressure on its BOP and the agricultural trade deficit
that had begun narrowing has widened sharply, putting in sharp focus issues
of food security. According to the Mexico's Inter-Institutional Working
Group on Foreign Trade the import bill for cereals more than doubled in
the first trimester of 2008 as compared with the same period last year[30].
Even though no where as sharp as the increase in the cereal import bill,
price increases has meant that import costs of oilseeds, milk, eggs, meat
and meat products has increased significantly. At the same time prices
for most of Mexico's agricultural exports such as fruits and vegetables
have either stagnated or declined.
In many ways therefore, despite the strides in agricultural exports, Mexico's
NAFTA based transnational agri-business driven agricultural strategy must
be deemed a failure. Food production has stagnated, cultivated area under
food production has declined and the underinvestment that has characterized
Mexican agriculture in the 1980s has not been reversed. The problem of
food security has reappeared and because of large migration of farmers
and farm labour to USA, depleting the rural countryside of the human resources
it requires for an agrarian revival, even if public policy chose to focus
on it.
III: An Alternate Modernisation Model
If the declining share of agriculture in the workforce alongside increasing
per capita incomes is one of the most robust stylizations in development
economics, it does not follow, as the experience of Japan, South Korea
and Taiwan province of China tells us, that the brunt of this adjustment necessarily has
to be borne by small farmers. At issue is the nature of the agricultural
modernization model should it be based on land alienation driven by
large farmer and transnational agri-business interests, where both these
dominate the rural landscape; or will it be a model based on mixed income
households where small farmers are competitive because of achieving economies
of scale and scope in the purchase of inputs and in processing, storing,
marketing and distributing their crops and with a significant proportion
of household labour involved in non-farm activity as well.
The key therefore lies in intermediating between the small farmer and
the market in a way that enhances both his/her profitability and market
opportunities. As Alicia Puyana commenting on the stagnation in Mexico's
grain production and the widening gap between USA and Mexico notes "To
make domestic products competitive, it is not sufficient to open markets
to foreign competition."[31]
What development experience does teach us, and Mexico is a good example,
is that the market left to itself will not invest in intermediation infrastructure
for small farmers credit, storage, marketing, input purchase and extension.
Wherever such investment has happened it has been through co-operative
mechanisms or public sector involvement or a mix of both. India's dairy
industry and the Amul brand are very good examples. Therefore both these
large farmer and trans-national agri-business centered and small farmer
and co-operative agri-business centered - are feasible and extant models,
even though most people (and most economists) associate modernization
with the former.
As Dr. M.S. Swaminathan, architect of India's green-revolution and former
Chair of the National Commission of Farmers, has repeatedly argued, India
and other developing countries need a second green revolution but this
time centered not around land alienation and large farmers but land conservation
and small-farmers. He argues that the energy intensive agronomic practices
of the first green revolution should be eschewed in favour of a small-farmer
based green revolution where traditional methods of soil health enhancement
and pest management should be refined and blended with modern technology[32].
A small-farmer centered green revolution alongside a co-operative and/or
public sector driven investment in market intermediation infrastructure
credit, extension, input-purchase, storage, trading, marketing, and
insurance would ensure that small farmers are both profitable and productive.
This strategy would, as he argues, address concerns about food-security,
livelihood security, environmental conservation and sustainable growth.
Therefore one part of the solution to the problem of food-security and
sustainable growth is in the hands of 450 million small and marginal farmers
(globally) that neoliberal economic policy has tried so hard to alienate
from their land. And in addition if we are able to put in place a strategy
of maximising non-agrarian employment growth, then rural-to-urban migration,
which is necessary concomitant of per capita income growth, would be a
matter of choice and not compulsion.
It is useful to remember that in 1991 prior to the advent of NAFTA -
agriculture and allied activities only accounted for 27% of Mexico's labour
force. In other words, the occupational structure transition that is characteristic
of increasing per capita incomes was already underway. For most developing
countries including India however, even today agriculture and allied activities
account for more than 50% of their workforce. Therefore an agricultural
modernization programme that does not take into account the needs of small
and marginal farmers and agricultural labour would not only economically
but equally importantly, politically, unsustainable. Equally, it is important
to remember that 95 percent of the world small and marginal farmers live
in poor, developing countries and that 75% of the world's poor survive
on agriculture. For developing countries therefore the key to both food
security and livelihood security is the ability to protect small and marginal
farmers from unfair competition and the policy space within which develop
an agricultural policy centered around small-farmers and the maximization
of employment growth.
Therefore whether or not Mexico's current agrarian crisis can be blamed
entirely in NAFTA is beside the point. What it does suggest however is
that when economies asymmetrically situated in terms of productivity integrate,
then left to the market, the burden of adjustment is borne by agents with
the lowest productivity in this instance small farmers and agricultural
labour in Mexico. This effect gets compounded when agents in the higher
productivity economies are subsidized to maintain income levels (in this
instance farmers in USA and Canada). But as we have seen integration and
modernization does not have to be like this. Economies should be allowed
to choose the pace and pattern of integration and modernisation, defined
as sustained and sustainable increase in per capita incomes, depending
upon their institutional structures and historical trajectories. Clearly
one size does not fit all. Therefore if developing countries are not given
the policy space within which to protect small and marginal farmers and
modernize their agriculture, they should walk away from Doha. Most in
any case do not even have Mexico's option of exporting farmers and farm
labour to USA.