(Published in The Business Standard on 10th May 2005)
In 2003, the United States exported 3.8 million tonnes of rice, making it the third largest exporter in the world, trailing only behind Thailand and Vietnam. This is despite the fact that it costs twice as much in the US to grow rice than it does in the other two countries. Such sterling export performance has been aided by the US$ 1.3 billion (72% of the total cost) that the American rice farmers got as subsidies in 2003! (Oxfam Briefing Paper 72: Kicking Down the Door, 2005)
Not all countries can afford to bankroll their way to a comparative advantage in trade, especially when there is none. Certainly, not the developing countries. The dictum of classical economic theory where trade specialisation takes place according to comparative advantages is out of operation in a trading architecture riddled by trade distorting domestic support and high tariff boundaries. Will free trade that removes these distortions especially in developed countries, restore comparative advantages of developing countries in agricultural commodities, increase their export earnings, boost wages of their unskilled labour and stimulate economic growth in general?
Arvind Panagariya of Columbia University, thinks otherwise. His conclusions are born out of the fact that most of the least developed countries (LDCs) are net importers of agricultural commodities – 45 of the 49 LDCs import more food than they export. In his paper, ‘Agricultural Liberalisation and the Developing Countries: Debunking the Fallacies’ (2004), he contents that if subsidies are removed, the net importers of food will end up paying more for food. This loss will not be offset, unless they can become sufficiently large net exporters. Cut in rich country subsidies will therefore benefit only big agricultural exporters such as Brazil and Argentina, while most LDCs will be worse off than they were before. Although his arguments are not backed by substantive empirical analyses, some other studies estimate that larger countries will benefit, while smaller countries in the same regions will suffer (for example India will benefit, while the rest of South Asia will lose out). If poor countries emerge as net losers, it could stem their enthusiasm for the Doha Development Agenda and jeopardise liberalisation of trade in future.
Therefore, he argues that the poorest nations are better off with high domestic subsidies in developed countries so long as they get preferential access, while larger developing country exporters are kept out by high tariffs. He cites the European Union’s Everything But Arms (EBA) initiative (or more precisely, Everything but Arms, Bananas, Rice and Sugar initiative!), that gives duty and quota free access for LDCS to sell at the high prices prevalent in the EU markets.
William Cline of the Centre for Global Development draws diametrically different conclusions about the impact of trade liberalisation on the basis of his empirical analysis and economic modeling in his book ‘Trade Policy and Global Poverty’ (2004). He argues that liberalisation of agricultural markets is the most important way to reduce global poverty as three-fourth of the world’s poor (living on less than US$2 a day) are in rural areas. Rural poor are more likely to be dependent on farming and any increase in export opportunities will increase their income. The gains of the rural poor will outweigh the losses of the urban poor and there will also be a redistribution of income from cities to villages. Cline estimates that global free trade could increase agricultural prices by 10%, hike real wages of unskilled labour in developing countries by 5% and boost global economic welfare of developing countries by $90 billion annually. This, he estimates could pull 200 million people out of poverty, or 650 million people, if one factors in capital investment and a longer term period of 10-20 years. Welfare gains are highest from liberalisation of agriculture, followed by textiles and apparels.
The US$90 billion that developing countries could gain will dwarf the US$ 50 billion that developing countries receive as aid. Yet another argument, in favour of freer and fairer trade over aid and preferences. Interestingly, this corroborates Oxfam’s calculation in its trade report in 2002 (Rigged Rules, Double Standards) that put the loss to developing countries due to rich country trade restrictions at US$100 billion a year. Cline cites evidence that only a sixth of the world’s poor live in the net food importing countries and estimates that over 130 million people could be pulled out of poverty in India and China alone. If this were put in the perspective of the global target of halving poverty by 2015, it would reflect significant advances in the two biggest battlefields. Here, one of Pangariya’s arguments merits consideration – trade liberalisation has adjustment costs that could impact smaller and poorer countries more. Hence, compensation programmes need to be designed smartly to factor these costs in and prevent these countries from being disenchanted.
However, to cite these adaptation pangs and static losses to net food importing countries as reasons enough to preserve status quo and debunk trade liberalisation where it is needed most, is strange. As strange as the American comparative advantage in rice. Moreover, it cannot be ignored that many LDCs are net food importers today due to pressures from beyond their borders. Rice imports to Haiti, an LDC, increased by 150% between 1994 and 2003 after the International Monetary Fund forced it to cut rice tariffs from 35% to 3%. Ironically, three out of four plates of rice consumed in Haiti today come from the US. Any guesses on the number of empty plates in the homes of impoverished Haitian rice farmers?
Panagariya, A., ‘Agricultural Liberalisation and the Developing Countries: Debunking the fallacies’ , 2004
Cline, W., ‘Trade Policy and Global Poverty’, Centre for Global Development, 2004
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