Farm liberalisation will hurt LDCs

While the overall costs of agricultural protection and subsidies in the rich countries fully justify their dismantling, the policy discourse on the subject has suffered from deliberate obfuscation, with political correctness rather than economic logic driving it.

(Economic Times,  March 23, 2005)

While the overall costs of agricultural protection and subsidies in the rich countries fully justify their dismantling, the policy discourse on the subject has suffered from deliberate obfuscation, with political correctness rather than economic logic driving it.

The argument that dominates the media waves is that the rich-country subsidies and tariffs, especially those applied by the European Union (EU), hurt the poorest countries most. The subsidies depress the world prices of the goods exported by these countries and tariffs deprive them of the access to the rich country markets.

This plausible-sounding but economically incorrect argument probably originated in the pronouncements of the World Bank leadership at the turn of the millennium. But it is now widely accepted. The result is that one can scarcely distinguish the view of such mainstream institutions as the World Bank, IMF and Organisation of Economic Cooperation and Development (OECD) and of the straight-shooting newspapers such as the Financial Times and The Economist from that of the United Nations, South-South Centre and a host of anti-globalisation NGOs, which instinctively blame the rich countries for the ills of the poor countries.

Thus, a joint "declaration" by the heads of the IMF, OECD and World Bank issued on the eve of the WTO meeting at Cancun began by arguing how important was agriculture to the well-being of the poor countries and went on assert: "Yet, developed countries impose tariffs on agriculture that are eight to 10 times higher than on industrial goods.Many continue to use various forms of export subsidies that drive down world prices and take markets away from farmers in poorer countries." [Emphasis added.]

Similar assertions can be found in The Economist, UN Human Development Report and the publications of NGOs Oxfam and Third World Network. The economics Nobel Laureate Joseph Stiglitz is equally supportive of this view in his widely circulated book Globalisation and its Discontents.

There is little doubt that some developing countries, mainly those belonging to the Cairns Group, namely, Argentina, Brazil, Chile, Colombia, Costa Rica, Indonesia, Malaysia, Philippines, South Africa, Thailand and Uruguay, will reap substantial benefits from rich country liberalisation in agriculture. But these are not poor countries. The truly poor countries are those classified as the least developed countries (LDCs) by the UN. Ironically, these countries stand to lose from liberalisation. Let me explain why.

Under the 'everything but arms' (EBA) initiative of the European Union (EU), LDCs can freely sell their exports at the internal EU price. In effect, the EBA gives the LDC sellers the same protection the EU producers enjoy under the tariff-subsidy regime currently. This protection to the LDC exporters will end with liberalisation.

Moreover, protection and subsidies by the rich countries depresses the world prices. As importers, LDCs have access to these low prices. Once the subsidies and protection are eliminated, the world prices would rise and hurt the importers. For many LDCs that are large importers of agricultural products, especially food, these losses could be substantial. With a handful of exceptions, the LDCs are net food importers. A large majority are even net agricultural importers.

Some may argue that the importing LDCs need not necessarily lose since they may turn into exporters in a regime that is free of interventions. But this is a logically incorrect argument. Under the current regime, the LDCs are allowed to export at the internal EU price. In the liberalised world, the EU internal price will coincide with the liberalised world price, which will settle below the current EU internal price. The LDCs that are unable to export at the current EU internal price will surely not be able to export at that lower, liberalised price.

The danger that the LDCs will lose from the rich country liberalisation is even greater than suggested by these arguments. In anticipation of the liberalisation under the Doha Round, developed countries are already raising non-tariff barriers in the form of sanitary and phytosanitary (SPS) measures. This process will escalate in the post-Doha world. And in so far as the poorest countries are at a much greater disadvantage than their counterparts in the Cairns Group and the developed world at satisfying the higher SPS standards, they are in danger of losing even some of their existing market access.

How do we then explain the ruckus at Cancun over the cotton subsidies, since some of the poorest countries demanded their end? The answer is that this case is consistent with the popular rhetoric of the rich country subsidies hurting the poor countries but it is also an exception. This is a product in which the EU does not have major producer interests to protect so that its internal price is close to the world price. Therefore, the EBA is not much help in this product. But even here a country like Bangladesh, which imports cotton, will lose from the hike in the cotton price.

Some analysts assert that even if the importer countries as a whole lose, the poor farmers within them would benefit from increased prices. But the better policy to achieve this outcome is to impose countervailing duties on the currently subsidised imports. Yet, astonishingly, no one from the multilateral institutions or Oxfam has made that recommendation.

Simplistic assertions that rich country protection hurts the poorest countries may make one popular with the poorly informed but they do no good to the poor themselves. For, when the poor countries eventually find out that the promised gains from liberalisation did not materialise, they will only be disenchanted with future liberalisation. Moreover, without recognition of the detrimental effects, we will fail to design compensation mechanisms and safety nets necessary to smooth out the adjustment to the more liberal regime in the poor countries. We will also fail to assist them in the acquisition of capacity to satisfy the SPS measures that are turning into the new frontier of developed country protectionism.