GENEVA, 5 June 2006: Recent studies have predicted losses for Africa from the Doha trade round, not only in the industrial sector, but also in agriculture. This is contrary to the conventional view of many African policy makers who believe that, that even if they lose out in the industrial sector, in the long run, their agricultural sectors will benefit from reforms by the heavily protected agricultural producers, the US and EU and Japan.
Contrary to these expectations, however, research from the World Bank, the Carnegie Endowment, the European Commission, and the Food and Agriculture Organisation (FAO), shows that the majority in Africa will be faced with losses as a result of agricultural and industrial liberalisation. Even if agricultural export markets were open to Africa, the majority of African producers – of whom the vast majority are subsistence farmers – will not be in a position to compete. In addition, they will lose through having to open their domestic markets in the negotiations. The poorest countries in Africa will be worst hit – many are least developed countries (LDCs) countries in Sub- Saharan or East Africa. Technically, LDCs do not have to lower tariffs in the Doha Round, but because of regional customs arrangements with non-LDC African countries, imports will easily find their way to LDC countries.
WORLD BANK
Before the Hong Kong Ministerial, the World Bank revised its estimates of global gains from the Doha Round. From the optimistic $832 billion in global gains predicted pre-Cancun in 2003, this was readjusted to $287 billion globally, and to a modest $96 billion in a "likely Doha" scenario. But more worrying was the message for developing countries – predicted gains would be just $16 billion and this would not be evenly distributed.
Instead, the Bank concluded that the benefits would be captured by a few large developing countries such as Argentina, Brazil, India. "Bangladesh and many African countries benefiting from preferences are likely to face losses". (1)
In addition, before Cancun, the Bank had claimed that even if developed countries remained intransigent on domestic supports, developing countries would gain from liberalizing agriculture. More recent studies by the Bank, however, reflect a contrary conclusion. Developing countries would see a greater improvement in their net food trade (exports minus imports) if rich countries liberalized their agricultural markets, but developing countries do not. As a group, gains would amount to $142 billion from improved exports.
However, if developing countries are also made to liberalise their markets, the biggest winner in terms of redistributed farm income would be the US, followed by Argentina, Brazil, and other Latin American countries, Australia and New Zealand. Sub-Saharan Africa may experience some small gain, whilst China, India and the rest of South Asia would be net losers.(2)
The World Bank model, however, is flawed because it assumes full employment of all labour, including unskilled labour. Some corrections were made to it in the Carnegie study.
CARNEGIE REPORTS
The report by the Carnegie Endowment for International Peace "Winners and Losers: Impact of the Doha Round" by Sandra Polaski (June 2005) improved on modeling exercises by incorporating actual unemployment rates. It also treats agricultural labour markets separately from urban unskilled labour markets in developing countries.
The findings in the Carnegie study run "counter to the commonly held view about the Doha Round, namely that agricultural liberalisation benefits developing countries and therefore is key to achieving the development goals of the Round. In fact, agricultural liberalisation benefits only a relatively small subset of developing countries" (Polaski 2006; 25)
Those benefiting include Brazil, Argentina, most of Latin America, South Africa, and some Association of Southeast Asian Nations (ASEAN) member countries, notably Thailand. However, according to Polaski, the losers in agricultural liberalisation include many of the world's least developed countries, including Bangladesh and the countries of East Africa and the rest of Sub-Saharan Africa. The Middle East, North Africa, Vietnam, Mexico and India and China would also experience losses.
A valuable contribution made by the study is its simulation of the "special products" scenario. The scenario modeled was an "outer bound" of any agreement that might be reached under the Hong Kong framework, in which developing countries are permitted and choose to shelter all their agricultural products from liberalization, categorizing them as "special products". (The countries pushing for this provision, the G33, have asked for twenty per cent of tariff lines to be permitted this treatment. The US is arguing to allow just five.)
Two important conclusions are drawn:
1) There are only minor reductions in other countries' income gains if all products are classified as special products, even for the group of exporting countries that are most affected (eg. Argentina, Thailand).
2) Bangladesh and East African countries still experience losses if all products are classified as special products. The losses experienced are slightly smaller than if there were no special products.
The conclusion Polaski draws is that "Unless special measures are taken on their behalf [that is, over and above special product] Bangladesh, East Africa, and the rest of Sub-Saharan Africa are adversely affected in every Doha scenario modeled, regardless of whether the level of ambition is modest or high." (3)
This conclusion is similar to Polaski's findings in an earlier paper, "Agricultural Negotiations at the WTO: First, Do No Harm", where she points out that the special and differential treatment the poor countries in the WTO are asking for remains inadequate:
"Alternative approaches, such as allowing developing countries to make smaller tariff reductions on a limited number of special products or allowing longer transition periods to implement tariff cuts, do not offer adequate flexibility for countries with significant labour concentration in small-scale agriculture."
The "Winners and Losers" report gives three main reasons why most developing countries lose out in the agriculture talks. First, many poor countries are net food importers. Second, with liberalisation, many will also lose the advantages of the current preference programmes (for example, the Africa Caribbean Pacific, ACP, countries' preferential access to the EU market). And third, low-productivity, small-scale subsistence farming makes up the large portion of agricultural activity in many developing countries. The products of subsistence farmers are generally not competitive on the global market.
Polaski explains, "Forcing poor farmers to compete with global agriculture will not hasten an increase in their productivity if they do not have sufficient land, access to credit, high-yield seed, water, technical assistance, and other necessary inputs… For any crop, there may be many countries, both developed and developing, that can produce at lower costs than those of subsistence farmers elsewhere, due to economies of scale, mechanization, superior inputs, climatic conditions, government subsidies, or a range of other factors." (4)
Even for competitive agricultural exporters, such as Argentina, Brazil and Thailand, the gains from the agriculture negotiations are small. The highest gains amount to only $358 million for Argentina.
Overall, the gains from the Round are modest – a one time increase in world income of between $40 – 60 billion. Developing countries receive $21.5 billion (with China accounting for $10.6 billion from manufactured goods liberalisation). The majority of African countries lose out as a result of both agriculture manufactured goods liberalisation. Sub-Saharan Africa, says Polaski, "loses world market share in some or all manufactured products." (5) This is due to lower world prices in manufactured products which will affect the labour-intensive sectors in LDCs.
In exports, the poorest developing countries, including LDCs will experience an overall decline as a result of the Round. Similarly in incomes, losses are expected – the biggest losses (0.8 per cent of GDP) go to East African countries, Tanzania, Uganda and Malawi. Polaski concludes that other Sub-Saharan countries whose economies share similar structures and endowments as these countries are likely to experience a similar magnitude of losses.
THE EUROPEAN COMMISSION'S SUSTAINABILITY IMPACT ASSESSMENT
The European Commission's own sustainability impact assessment (SIA) of the Doha Round, carried out by the University of Manchester shows results that are quite similar to those of Carnegie and the World Bank.
Overall, the SIA reports that
1) the world's poorest countries, such as "in Sub Saharan Africa for example, poverty may worsen as they stand to lose economically from trade liberalisation and face severe supply side constraints." (6)
2) The adjustment period – associated with increased unemployment or underemployment – "can be severe …where social protection is weak or absent." According to the authors, these adverse effects may continue into the longer term in the absence of appropriate policies to support the creation of new employment opportunities. (7)
3) Countries can also face "a significant loss of tariff revenues, with possible negative indirect social impacts".(8)
4) Global environmental impacts are expected to be negative – from adverse effects on climate change to global biodiversity. More pressures as a result of increased agricultural production will be put on biologically sensitive areas, once again, affecting developing countries more negatively.(9)
Specifically on agriculture, the SIA concludes:
– Countries that are globally competitive will gain from increased market access. However, "the majority of developing countries are unlikely to derive any significant direct benefit… The countries that will derive the least benefit, and may even incur losses, are those in which domestic agriculture has the least capacity to export, or are net food importers". (10) (The majority of African countries are net food importers.)
– Where rural production is uncompetitive, "liberalisation can lead to increased lower cost imports which compete with domestic producers. The decline in agricultural production will be associated with significant adjustment costs".(11)
THE RESEARCH AND INFORMATION SYSTEMS FOR DEVELOPING COUNTRIES (RIS) POLICY BRIEF
As if the implications for developing countries are not sobering enough, Timothy Wise and Kevin Gallagher of Tufts University in their RIS Policy Brief #22 "Doha Round and Developing Countries: Will the Doha Deal Do More Harm than Good?" (http://www.ase.tufts.edu/gdae/Pubs/rp/HiddenCostsApr06.htm) have pointed out that the global trade simulation models have overestimated the gains from Round simply because they have not taken into account the losses in tariff revenues countries will experience from liberalization. Wise and Gallagher estimate that the total losses for the developing world, only under the NAMA negotiations, could be $63.4 billion – ten times the gains for developing countries as a whole in NAMA (which is $6.7 billion)! These losses will again be most difficult for the poorest countries to bear. Income from tariffs account for more than twenty per cent of government revenue in more than half of Sub-Saharan African countries, more than fifty per cent for Niger and the Gambia, and more than forty per cent for Benin, Lesotho, Madagascar, Mali, Togo and Uganda. (12)
The economic models assume that governments' fiscal balances are fixed i.e. that revenue losses are made up for through domestic taxes. Historical evidence has shown that this is simply not the case. Many developing countries with large informal sectors cannot be taxed efficiently. And whilst the VAT has generally been introduced to replace losses from trade taxes in poor countries, the IMF estimates that it has on average replaced less then thirty per cent of the revenues lost. (13)
FAO ON PREFERENCES
The concerns raised in the World Bank, the Carnegie and the European Commission reports regarding the loss of preferences by poor developing countries as a result of most favoured nation (MFN) liberalisation is echoed by the FAO:
1) "If the current trade liberalization process does not pay particular attention to the situation of the preference dependent countries, in most cases the resulting costs to them may be larger than the benefits". (14)
2) Past financial instruments to address such problems "are considered to have lacked sufficient scale" and "concessionality".(15)
3) Aid alone is not sufficient: "Progress on adjustment assistance might be approached in addition to, not in place of, the design of an improved preferential regime for specific countries." (16)
FAO'S RECOMMENDATIONS ON AGRICULTURAL POLICIES FOR LOW INCOME DEVELOPING COUNTRIES
In a recent technical note number 14 "Towards appropriate agricultural trade policy for low income developing countries," the FAO made these observations and recommendations for the poorest members of the WTO:
1) Widespread Market Failures in Poor Countries Require State Intervention Including Border Protection
Reviewing the agriculture development literature, the FAO concludes that it is well established that agricultural producers in many developing countries face widespread market failures. As a result, they cannot generate investible surpluses, which are then used to facilitate the generation of higher value activities. This process is essential for moving towards greater diversification.
The widespread market failures include weak input and output markets, lack of seasonal financing, limited risk management instruments etc. (17) Such a transition is "not likely to occur where market failures are pervasive without "significant government intervention at early stages of development".
There is therefore no evidence that a laissez faire trade liberalisation policy will bring the development countries are looking for. In fact, the Dorward and Morrison 2001 study "The agricultural development experience of the past 30 years: lessons for LDCs", found that countries which have sustained agricultural growth were the ones that did not adopt a liberal policy stance from the start, but "lift(ed) the constraints to continued growth in a sequential manner, while at the same time intervening to secure the necessary favourable environment for the transformation of their agriculture sectors". It is "during phases of border production" that "instances of induced innovation have been observed, with productivity growth rates exceeding those that might have been achieved in more liberal environments". (18)
2) Strong Evidence that Agriculture is an Engine for Broad Based Growth, but Linkages to Local Economy Required
The FAO found that there is a high degree of correspondence between patterns of agricultural growth and patterns of poverty reduction across developing country regions. Agricultural growth can have disproportionately positive impacts since it can stimulate increased domestic demand, through increased rural incomes, hence supporting growth in other sectors. "In practice also, there are few obvious alternatives to agriculture as drivers of broadly-based growth in countries still in the early stages of development". (19)
However, in order to have such positive outcomes, the sector has to have "substantial linkages with the local economy" and such ""linkage rich" agricultural development will generally be encouraged by labour intensive, rather than capital and / or specialist knowledge intensive methods of production, by more equitable distribution of income, by local consumption patterns favouring local rather than imported goods and services, and by links to wider produce markets that can continue to absorb production increases without large falls in produce prices". (20)
Gradual and sequential lifting of constraints to growth of the sector has to be supported by conducive institutional arrangements in the political, legal and economic spheres.
3) Exports Alone is Not the Solution to Poverty Reduction
If it is taken as a given that the productivity of local producers should be increased in order to increase incomes and purchasing capacity, should this be through an export promotion strategy or an import substitution strategy?
When measuring the impact of the export model, the FAO concludes that the size of the sector matters. "Where the agricultural sector is a large part of the economy, rapid reduction in protection for the sector as a whole may generate significant unemployment and rural-urban migration. On the other hand, where the sector as a whole is a modest part of the whole economy and, a fortiori, where it is a modest part of the rural economy, any unemployed labour may be rapidly reabsorbed". (21)
"In some cases of export led growth there is evidence that consolidation into larger farms has displaced the livelihoods of small producing households. The number of individuals absorbed into alternative employment is likely to be less than the number displaced." (22)
In the case of Chile, for example, where the share of agriculture in total employment and the share of agricultural exports in total merchandise exports are less then twenty per cent, the impact on the distribution of income may be negative for only a small proportion of labour. However, in countries with larger agricultural sectors, the negative income distribution effects would be more visible. In Latin America, agricultural employment generally only makes up less than twenty per cent of overall employment. This ratio is significantly higher in Sub-Saharan Africa (66 per cent) and Asia (56 per cent).
Citing Foster and Valdes (2006), the FAO notes that even in Latin America, it is observed that the export strategy did not contribute to the reduction in poverty. Even though the region as a whole is a net food exporter, only six out of the twenty-two countries are net food exporters (Brazil, Argentina, Uruguay, Paraguay, Bolivia and Nicaragua). Whilst exports did not leave the sector as a whole worse off, it did not benefit all sections of population within the sector either. Those that have not benefited include small farmers and farmers in low productivity areas. The growth of the sector is currently limited by domestic demand and remains dependent on exports.
4) Employment is More Important than Cheap Food
Protection in developing countries is often discouraged by neo-liberals as detrimental because it leads to higher food prices, affecting the urban poor. The FAO however, concludes that the impact of policy intervention on real income is more important than its impact on price levels. The major concern of poor urban households is employment income (and the availability of employment), rather than the price of food products. This is similarly the case for those in the rural economy.(23)
5) Importance of Local and Regional (Internal) Markets
In poor countries, such as in Sub-Saharan Africa, there is no viable domestic market for higher value products. FAO notes that international markets for these products are also difficult to access, given the distortions in the OECD.
In contrast, the majority of rural poor in Sub-Sahara Africa are in staple food sectors which compete with imports. There is therefore "considerable potential for growth" in these staple sectors (obviously only if tariffs are high enough to keep imports out) and the domestic market "is likely to provide a more promising outlook in the short to medium term than international markets." (24)
For small farmers, production for the local and regional markets, as a trade strategy, is less risky. It also avoids the problems of quality standards etc. (25)
The FAO also cites evidence in Asia to illustrate the importance of large domestic internal markets – they have often been a pre-requisite to agriculture based growth in Asian economies. These internal markets facilitated the marketing of surplus commodities to deficit areas, helping to ensure stability of prices (Indonesia before the 1997 financial crisis is an example). Today, domestic markets – such as those in the Sub-Sahara Africa – are relatively small but regional markets can play the same role.
6) Full Trade Reform in Sub-Saharan Africa Could Lock Countries into Low Value Production
Finally, the FAO technical note also cites research by Achterbosch et al (2004) suggesting that Africa will embark on the road to deindustrialization if there is full trade reform. Rather than facilitating diversification, contraction of higher value added – of light and heavy industrial and services sectors – is a likely consequence. This leaves Africa only with the option to expand production in traditional agricultural commodities.
The effect is that these countries become locked into production patterns reflected by their current comparative advantage, rather than being allowed to develop a comparative advantage in higher value activities. (A point not highlighted by the FAO paper is that demand for traditional agricultural commodities tends to be inelastic – hence production increases have in part led to long term price declines. Such declining terms of trade will only add to the economic woes of these countries.)
Citing Dorward et al (2004), the FAO concludes that: "Many of the contemporary poorer countries have by-passed a critical stage of support to their agricultural sectors. Many of these countries are now left with relatively liberal trade policies, but weakly developed agriculture sectors, the development of which policy makers are now less able to support in the longer term and which, by virtue of low levels of applied border protection, are also more susceptible to short term external shocks".(26)
* Aileen Kwa is a research associate with Focus on the Global South based in Geneva. She is co-author with Fatoumata Jawara of "Behind the scenes at the WTO", Zed Books, 2004. She can be contacted at [email protected]
NOTES
1. Anderson and Martin 2005 "Agricultural Trade Reform and the Doha Development Agenda", World Bank.
2. World Bank 2005 "Global Agricultural Trade and Developing Countries", p. 124-25.
3. Polaski ibid. p. 32.
4. Polaski S 2005 "Agricultural Negotiations at the WTO: First, Do No Harm", Carnegie Endowment for International Peace, June.
5. Polaski 2006 "Winners and Losers" p. 27
6. Kirkpatrick C, George C, and Scrieciu S 2006 "Sustainability Impact Assessment of Proposed WTO Negotiaitons: Final Global Overview Trade SIA of the Doha Development Agenda", University of Manchester, Consultation Draft. p. iv. http://www.sia-trade.org/wto/FinalPhase/GLOBALOVERVIEW_FINALMay2006.pdf
7. Kirkpatrick et al, ibid, p. iv.
8. Kirkpatrick et al, ibid, p. v.
9. In addition to the EC's SIA, the World Watch Institute recently issued a sobering brief "The Irony of Climate" highlighting the impact of climate change on agricultural production. As temperatures rise, crop productivity decreases. In rice, wheat and maize, grain yields decline by 10 per cent for every 1 degree C increase in temperature over 30. There are predictions that grain yields in the South East and South Asian region might fall as much as 30 per cent over the next 50 years, during a period when the region's malnourished population has been projected to increase by 44 per cent. Also as a result of global warming, the incidence of pests increase, again impacting more negatively in the developing world residing in the tropics. (Halweil, B 2005, Excerpted from the March /April 2005 World Watch magazine).
10. Kirkpatrick C et al, ibid. p. 50.
11. Kirkpatrick C et al, ibid. p. 50
12. Osakwe, P 2006 "Emerging Issues and Concerns of African Countries in the WTO Negotiations on Agriculture and the Doha Round". Paper presented at the FAO Workshop on WTO Rules for Agriculture Compatible with Development. 2 – 3 February 2006, FAO, Rome, cited in FAO Trade Policy Technical Notes No. 14 "Agricultural Trade Policy for Low Income Developing Countries".
13. Baunsgaard, T and Keen M 2005 "Tax Revenue and (or ?) Trade Liberalization". Working Paper 05/112, IMF, Washington D.C.
14. FAO Non-Reciprocal Agricultural Trade Preferences: Trade Policy Brief No.7 on Issues Related to the WTO Negotiations on Agriculture, Rome. p7. ftp://ftp.fao.org/docrep/fao/008/j5424e/j5424e00.pdf
15. FAO ibid. p. 9.
16. FAO ibid. p. 13.
17. These market failures are never taken into account in the global trade simulation models, where it is assumed that resources move effortlessly from traditional agricultural activities into higher value added activities (FAO 2005 Technical Note No. 14).
18. FAO 2005 "Towards Appropriate Agricultural Trade Policy For Low Income Developing Countries", FAO Trade Policy Technical Notes on Issues Related to the WTO Negotiations on Agriculture. No. 14. p. 3. http://www.fao.org/documents/show_cdr.asp?url_file=/docrep/009/j7724e/j7724e00.htm
19. FAO ibid. p.3
20. FAO ibid. p. 3
21. FAO ibid. p. 6
22. FAO ibid. p. 6
23. Morrison and Sarris 2006, Dorward et al 2004 and Poulton 2005 cited in FAO, ibid. p. 5
24. FAO, ibid. p. 6
25. FAO ibid. p. 6
26. Dorward et al 2004, cited in FAO ibid. p. 8
