Trade Analysis for Development Policy:

Lessons from Cross-country Studies

Kym AndersonUniversity of Adelaide and CEPR

Annual Meeting of the Agricultural and Applied Economics Association, Denver CO, 25-27 July 2010

Financial assistance from the World Bank Trust Funds, particularly from DfID and BNPP, plus the ARC, 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. Project details are at www.worldbank.org/agdistortions

OutlineWhat have we learnt about how trade-related policies affecting agriculture evolve during the development process, the political economy forces behind them, and their effects?

What next, in terms of:

Prospective agric price and trade policy trends

Further research on distortions to agricultural incentives

Policy history pre-1950s

Agric trade has been restricted for centuries

Repeal of Britain’s Corn Laws in 1846 and subsequent freeing of European agric trade from 1860 was short-lived

Agric protection growth emerged in late 19th

century in Europe, & from 1904 in Japan

Agric tariffs raised further in early 1930s

• + preferential tariffs within British & other empires

Policy developments in 1950s/1960sGATT came into force in 1948, but initial rounds did little for agric markets

The 1958 Haberler Report on Trends in International Trade warned GATT Contracting parties of threat of agric protection growth in rich countries

Meanwhile, many developing countries, on gaining their independence (most by 1960), promoted import-substituting industrialization including via agric export taxation

Policy developments in 1970s/early1980s

D. Gale Johnson, in his 1973 book on World Agriculture in Disarray, despaired at the persistence of:

high agricultural protection in many high-income countries,anti-agric and anti-trade policies of developing countries, andthe tendency for both sets of countries to insulate their domestic food market from international price fluctuations

Disarray worsened for another dozen years, with agric protection growth in Europe, North America and Japan peaking in 1986, thanks to an agric export subsidy warMeanwhile, some middle-income economies ‘overshot’, going from taxing their farmers to protecting them from import competition (e.g. Korea, Taiwan)

Raising concern that other emerging economies may follow suit

Evidence of distortions up to mid-1980s

Extent of developing country policies’ effects on farmers’ incentives was provided, for 1960-84, by the 1988 Krueger/Schiff/Valdes study of 18 developing countries

Extent of high-income country policies’ effects on farmers’ incentives was provided, from 1986, by the OECD’s PSE/CSE estimates

Impact of both country groups’ policies in 1980s on the mean and variance of international food prices, trade and welfare was provided by various sectoral modeling groups

The good news for the 2 decades since

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 a larger role for 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, remaining distortionary agric policies as of 2004 are still large, and are still responsible for much of the instability in int’l agric markets

Evidence of lack of integration across

countries’ agricultural markets

Since 1974, real trade in all goods has grown at nearly twice the pace of real global GDP However, for agric, the share of global prod’n traded internationally has grown very little, apart from intra-EU tradeAgriculture’s 2004 share of global prod’n exported (excl. intra-EU) was only 8%

c.f. 31% for other primary products, 25% for other goods

How much have agric distortions been

reduced, how much intervention remains?

New World Bank study by 90 consultants, covering 75 countries (>90% of world agriculture) provides evidence for 1955-2007

available at www.worldbank.org/agdistortions

Measures Nominal Rate of Assistance for farmers (NRA)the percentage by which domestic prices for farm products exceed those in international markets

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

Defined as RRA = [(1+NRAagt)/(1+NRAnonagt)] – 1• so RRA<0 if NRAagt < NRAnonagt

Evolution of average RRA for all DCs, 1965-

2004: from very negative to slightly positive

10

-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

percen

t

NRA non-ag tradables NRA ag tradables RRA

However, many distortions remain

Still much dispersion of NRAag and RRAs across countries

Even more so if non-focus developing countries had been included

Also much dispersion of NRAs across products within the agric and non-ag sectors of each country

In particular, an anti-trade bias persists

Dispersion in NRAagric, focus countries, 2000-04

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NRAagric, focus vs predicted

non-focus countries, 2000-04 (%)

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SSAfrica non-focus

Asia non-focus

LAC non-focus

Africa focus

LAC focus

M. East & N. Africa non-focus

Asia focus

ECA focus

HIC focus

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

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High-income countries Developing countries

How far have policy reforms reduced the

disarray in world agricultural markets?

New partial equilibrium measures:a Welfare Reduction Index (WRI), anda Trade Reduction Index (TRI)

They are based on Anderson/Neary Trade Restrictiveness Index theory

modified to account for difference between agric NRAs and CTEs (both of which can be positive or negative)

We’ve estimated them for each of the sample 75 countries

Definition of TRI (or WRI)

That ad valorem trade tax rate which, if applied uniformly across all tradable agricultural commodities in a country, would generate the same reduction in trade volume (or same economic welfare loss) as the actual cross-product structure of NRAs and CTEs in that country

Welfare reduction index: DCs, HICs and ETEs,

1960-64 to 2005-07, 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,

1960-64 to 2005-07, 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

How far have policy reforms reduced the

disarray in world agric markets (continued)?

Global, economy-wide CGE modeling results on effects of distortions also suggest that, since the early 1980s, the world has gone 3/5ths of the way towards fully liberalizing goods markets, in terms of welfare effects of policies affecting all goods marketsBut agric now accounts 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 trade

And those policies harm agric value added 3 times as much as nonag value added in DCs, thereby contributing nontrivially to global poverty & inequality

Also, insulation of food markets persists, so

volatility of int’l food prices continues

Most farm product NRAs tend to be negatively correlated with movements in international product price

On average, for top dozen traded farm products, barely half the change in an int’l price is transmitted to domestic markets within first year

Applies to export as well as import restrictions

This is becoming a bigger issue as climate change adds to volatility of crop seasons, and as biofuel policy responses link food and fuel

What next, in terms of:

Prospective agric price and trade policy trends?

Further research on distortions to agricultural incentives?

Future agric market developments

Growth in populations and incomes

and hence demand for non-staple farm products

Crude oil price trends and fluctuations

and their impact on bio-fuel demand

Climate change impacts on farm TFP

and hence supplies of farm products

Int’l trade costs, FDI and the supermarket revolution

and their impacts on food value chains, incl. from ‘land grab’

Changes in ag R&D investments, incl. by private firms

biotech revolution, and in response to above developments

Future agric trade-related policy

developments

Unilateral reforms to policies distorting agricultural incentives

Multilateral reforms (will Doha conclude?)

Reforms to water institutions & policies

Other national and multilateral policy responses to climate change (eg biofuel)

Changes in public agric R&D investments

Will DCs move, like HICs did, to

protecting agric as their incomes rise?

-100

0

100

200

300

400

Rela

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ate

of

Assis

tance (

%)

-1 0 1 2 3Ln real GDP per capita

HIC RRA obs HIC fitted values

DC RRA obs DC fitted values

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 agric R&D investments has risen with higher prices & spectre of climate change

Hotter, drier, more volatile seasons add to need for more-integrated global food markets, so as to better share the burden of fluctuating weather, and for more-efficient water and credit markets

Implications for agric trade research agenda

Update, widen the country coverage of, and institutionalize NRA/PSE estimation for DCs

Africa: Gates-funded initiative (FAO/OECD), and also public rural expenditure monitoring (WB)

All DCs: update to 2009 using generic data (WB), so as to cover the price-spike 2008-09 period

Further devt of methodologies for measuring extent of govt distortions to incentives

How to deal with US, EU etc. biofuel mandates?

Water subsidies (incl. for capital works)?

Implications for agric trade research agenda

(continued)

Further analysis of causes of govt interventions

Political e’metrics to explain differences across countries in NRA trends, fluctuations & turning points

Further analysis of effects of govt interventions

Use the above in projecting model baselines forward

• Is status quo the most likely policy counterfactual?

• What about effects of climate change and associated policy responses on baseline going forward? Requires better modeling of energy, land and water markets (see GTAP devts)

Incorporate imperfect competition along the value chain for agric (and other) outputs and inputs?

Build stochastic models, to capture govt insulating behavior (and also greater seasonal volatility due to climate change) and food-fuel market linkages?

Examples of empirical agric trade

policy research agenda items

How well do trade policies stabilize farmer incomes/food consumer expenditure and prevent households falling into extreme poverty?

Compared with more-direct domestic policy instruments?

What role for trade-related policies in presence of externalities (e.g. invasive species, GMOs)?

What role for agric-related policies to mitigate climate change

e.g. affecting biofuels or reforestation, and their effects on food markets

Thanks!

For all Agric Distortions Research Project working papers and global distortions database, see www.worldbank.org/agdistortions

Anderson, K. (ed), Distortions to Agricultural Incentives: A Global Perspective, 1955-2007 , London: Palgrave Macmillan, Oct 2009

Anderson, K., J. Cockburn and W. Martin (eds.), Agricultural Price Distortions, Inequality and Poverty Washington DC: World Bank, March 2010

Anderson, K. (ed.), The Political Economy of Agricultural Price Distortions , New York: Cambridge University Press, forthcoming Sept 2010