Security Will Martin World Bank Washington DC 2 December, 2011 - PowerPoint PPT Presentation

Agricultural Trade Policies & Food Security Will Martin World Bank Washington DC 2 December, 2011 The views expressed in this presentation are those of the author only and not necessarily those of the World Bank

Road Map  Why do high and volatile prices matter?  Trade policy options for poor countries?  The collective action problem  Policy options

Why do high & volatile prices matter?

Food price volatility  Shocks to output are a major source both of income instability to farmers and of price volatility  Shocks to demand from — for instance — biofuels, may also contribute  Globalization helps reduce price volatility by diversifying sources of supply

Impacts depend on stock levels  If stocks are normal, adverse shocks can be absorbed by stock reduction  Key problems arise when stocks are low ◦ Reducing demand in line with supply requires large increases in price  Prices spend long periods in the doldrums punctuated by short but intense price spikes

Real wheat prices Source: USDA. Deflated using U.S. CPI

Impacts of food prices on the poor  Poorest spend 75% of income on staple foods  3/4 of poor people are rural & earn most of their income from farming ◦ Poor farmers don‟t gain much from higher prices  Many are net buyers of staple foods ◦ Little opportunity to increase output in response to higher prices  Net impacts on poverty? ◦ Are the gains to poor net sellers outweighed by the losses to poor net buyers? 7

1000 100 200 300 400 500 600 700 800 900 Rice & wheat prices, $US 0 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 Wheat Rice

2010-11 price surge Especially June to December 2011  ◦ Wheat, maize, many other commodities But fortunately not rice  Used detailed data on the extent of pass-  through into domestic prices Data on 28 countries & 38 commodities  Estimate that 44 million have been pushed  below the $1.25/day poverty line ◦ 68 million entering poverty; 24m escaping 9

Poverty impacts by country, % pt 4 3 2 1 0 -1 -2

Trade policy options for poor countries

What should poor countries do?  An attractive policy option is to: ◦ Restrict exports when world prices are high  Lower tariffs or pay import subsidies if an importer  Gouel & Jean show this can be welfare- improving for a small open economy ◦ Where food budget shares are high & policy makers are risk averse ◦ Where these conditions are not met, volatility is theoretically preferable ◦ Trade policy alone dominated by a combination of trade & storage policies

In practice  Many countries are strongly countercyclical with their trade policies ◦ May also raise protection and/or pay export subsidies when prices slump  Historically both industrial & developing countries have insulated in this way ◦ Although major exporters have learned that this reduces their perceived reliability as suppliers and encourages importers to protect ◦ Only WTO rules stopped rich countries using Variable Import Levies to export instability

South Asia Rice: Nominal rate of assistance vs World Price: Correlation: -0.754 600 30 20 500 10 0 400 -10 NRA % USD 300 -20 -30 200 -40 -50 100 -60 - -70 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Pw S Asia

Some simple principles  Import tariff reductions more frequent than export restrictions ◦ A mirror image so why criticize export restrictions more than import tariff reductions?  Export bans frequently used but export taxes almost always preferable ◦ Optimal price insulation likely to be partial ◦ Zero exports most unlikely to be optimal ◦ Export bans likely generate domestic price volatility ◦ Prospect of periods of very low domestic prices likely to reduce supply

The collective action problem

A collective action problem  If everyone attempts to reduce the impact of world price increases  The policy appears to be a success ◦ “Domestic prices rose less than world prices when prices surged”  But it may be collectively completely ineffective ◦ The world price increases one for one with attempts to lower domestic prices

Export restrictions ES  P w ES P  w c P w b P d a ED 0

And lower import barriers ES  P w P  w ES P  w P 0 ED  ED 0 Q

Like the grandstand problem  When everyone in a crowd stands up to get a better view ◦ No one does!  But unilateral refusal to participate isn‟t a solution ◦ If I don‟t stand up, I get a terrible view!  Unfortunately, insulation against staple food price changes can have more serious consequences ◦ Magnifies the volatility of international income transfers

Analyze price rises of 1973-4 & 2005-8  Use World Bank data on distortions to agricultural incentives ◦ Data for 75 countries ◦ Update to 2008  Assess the impacts of rising export barriers, declining import barriers, on world prices

Estimated impacts on world prices Impact of Δ Share due to Δ Protn Protn % % Rice 2005-8 46 45 Wheat 2005-8 28 30

Insulation in rich & poor countries 60  Developed countries 50 have traditionally used insulating policies 40 ◦ Very strongly in 72-4 & 30 84-86, 20 ◦ But much less in 06-08 10 Wheat HICs Wheat DCs 0 1972-74 1984-86 2005-08  WTO disciplines on -10 insulation? -20 ◦ eg ban on variable -30 levies? -40 -50

2008 surge, rice prices 250 Producer Price Asia Producer Price Africa Producer Price Latin America 200 International Reference Price 150 100 2006 2007 2008 2009 2010 50 0

2008 surge, wheat prices 250 Producer Price Asia Producer Price Africa Producer Price Latin America 200 International Reference Price 150 100 2006 2007 2008 2009 2010 50 0

Insulation policies  Clearly, insulation policies are much less effective than they appear to individual countries ◦ Redistribute, rather than reduce, domestic price volatility  For large countries, such as China, India and Vietnam, the effect is very direct ◦ Export restrictions raise world prices, reducing the effectiveness of the policy  For all countries, the collective action problem remains

International policy options

Current WTO policies  WTO bindings limit import tariffs ◦ Lower bindings mean less scope for tariff reductions ◦ Variable import levies banned in Uruguay Round ◦ Special Safeguards directly structured to insulate domestic prices  Export disciplines are very weak ◦ Export taxes not disciplined at all ◦ GATT Article XI bans export quantitative restrictions  Except in cases of food shortage

Questions for international policy  How might cooperative policies improve on the current beggar-thy-neighbor regime?  More information on stocks and policies  Would restrictions on export barriers help increase the confidence of importers? ◦ Should food aid be exempted from export bans  Should policies focus just on export barriers? ◦ Or include import barrier reductions?  How might international disciplines on trade and storage policies work? ◦ Convert export restrictions to taxes? ◦ Aim to reduce the degree of insulation?

Conclusions  Prices of staple foods prone to intense but short-lived price spikes ◦ Extremely costly for the poorest  Optimal policy for an individual country likely to involve beggar-thy-neighbor policies like export restrictions & import subsidies  But these policies collectively self-defeating  A key challenge is designing new policy rules to deal with the collective-action problem

References  Gouel , C. and Jean, S (2011) „Optimal food price stabilisation in a small open developing country‟ http://are.berkeley.edu/documents/seminar/Trade.pdf  Ivanic, Martin and Zaman „Short run impacts of the 2010- 11 food price surge on poverty‟ Policy Research Working Paper 5633  Martin and Anderson, „Export restrictions and Price Insulation during Commodity Price Booms‟ Policy Research Working Paper 5645