Speech

Agricultural Trade Reform: The Role of Economic Analysis, Remarks by Anne O. Krueger, First Deputy Managing Director, IMF

November 4, 2004

Good afternoon.

The organizers of this conference are clearly masters of timing. This is a vitally important topic. It has been for many years—but possibly never more so than now, with so much at stake in the Doha trade round.

But the timing of your deliberations is also a happy coincidence for me—my visit to Canberra was arranged long before I knew about this workshop. So it is an unexpected bonus for me to be able to join you.

I wish, though, the circumstances were different. I wish that in the year—almost to the day—since I last addressed a conference on agricultural trade I could recite the great progress that had been made. Instead, I find myself lamenting the fact that what progress there has been—and yes, there has been some, and it is welcome—has been modest. There has been no great leap towards a wider recognition of what all countries need to do to advance the cause of agricultural trade.

The state of play

A year ago, we were reflecting on the disappointment of the Cancun meeting. We were anxious about the dangers for the world economy if Cancun led to a failure of the Doha round as a whole. And we were licking our wounds over what was an intellectual setback: the best that could be said for the intellectual proponents of free trade after Cancun was that we had not lost the argument. We had, though, clearly not won it either.

That last still holds. The argument over free trade rages as fiercely as it ever has. There is widespread skepticism on the part of workers afraid for their jobs, farmers afraid for their livelihoods, and what we might term the NGO community, who appear convinced that free trade is harmful to the poor. Even more troubling is the persistent gap between the rhetoric of those who claim they believe in free trade and its benefits, and the policies they advocate or pursue that are, in practice diametrically opposed to trade liberalization.

Those of us convinced that the multilateral trading system established after the Second World War, and based on the principle of progressive trade liberalization, offers the best chance by far of raising growth rates and reducing poverty, have a long way to go. Remember, a multilateral approach to trading relationships had served many countries well in the nineteenth century: this is an approach with a long track record.

The importance of Doha

A successful outcome for the Doha negotiations is vital, and a deal on agricultural trade acceptable to all is key to this. Without substantial progress on agricultural trade, Doha will fail.

Failure would have damaging consequences for the global economy. It would undermine the multilateral trading system. It would lead to ever greater reliance on bilateral free trade arrangements which are a poor substitute for multilateral liberalization.

If the Doha negotiations fail—which I do not believe they will—it would be difficult to revert back to the status quo. Protectionist pressures might increase further. I think that is one reason why when negotiators look into the abyss, they decide not to jump.

Such uncertainty about the future of the world trading system could have an impact on longer term global growth prospects.

There has been progress in the past year. The Doha round has not been allowed to fail. At the eleventh hour, a framework for further negotiations was agreed at Geneva at the beginning of August. There has been much digging-in of heels, but ultimately, governments have displayed a great reluctance—reluctance greatly to be welcomed—to abandon the effort to reach agreement.

In the negotiations on agricultural trade, there was some progress in two areas. In an important step, the EU made a commitment to the eventual elimination of export subsidies. This is welcome.

There was also some progress on domestic subsidies. The US has shown a willingness to negotiate product-specific caps. The offer is still vague, but again, it is welcome.

But there has been virtually no progress on market access. It is not clear that the EU or, for that matter, Japan, have the political will to tackle this issue. Yet in analyses of the likely benefits of a successful Doha round it is market access that delivers much the largest share of benefits from a deal on agriculture.

Going forward: industrial country protection

So the August framework does not guarantee a successful conclusion of the round. An enormous amount of detailed work needs to be done to achieve that. Hardline positions will have to shift is there is to be a genuine prospect of success.

Major obstacles remain across the range of the negotiations. But it is clear that much more progress has to be made on agriculture if blockages elsewhere are to be cleared.

There is a great deal of sympathy for developing countries on agriculture. Governments in the developing world complain bitterly about agricultural protectionism in the industrial world. They are right to do so. The numbers leave no room for doubt. Industrial country protectionism in the agricultural sector inflicts considerable hardship on the citizens of developing countries—and of, course, the citizens of Australia and New Zealand, for example.

Take sugar, one of the most policy-distorted of all commodities. OECD support for domestic sugar producers is, roughly, the same as the total value of developing country sugar exports. It is estimated that a move to free trade in sugar would raise world prices by something close to 40%, increase the world trade in sugar by 20%. It would generate around $4.7 billion in welfare gains for the poor in developing countries alone, not to mention gains for other countries such as Australia and other sugar producers with comparative advantage.

Then there is cotton. Subsidies for cotton producers in industrial countries have proved to be one of the most contentious issues of the Doha talks. Just a glance at the numbers explains why. U.S. production subsidies are around $3.7 billion a year—about three times as large as US bilateral aid to Africa, and nearly a fifth of the value of world cotton production. The EU also subsidizes cotton, as do several developing countries. In 2001, the IMF estimated that these subsidies depressed the world price by about 12 cents per pound. That means the price is something like 20% lower than it would be otherwise.

As of November 1st, it was 51 cents a pound: pretty much where it was at the time of the Fund's estimate, and a steep fall from the 80 cents a pound seen at one point last year. This translates into losses for poor countries in West Africa and their farmers of some $250 million a year.

But we often overlook the costs that industrial country protectionism impose on the citizens of industrial countries. It imposes high costs on taxpayers. I mentioned sugar protection: it has been estimated that each of the 2,300 jobs saved in the American sugar industry through barriers to imports in the 1990s cost $800,000 per year. Each one.

And protection also imposes high costs on consumers, because it imposes higher prices. These costs fall disproportionately on poor consumers. In all countries, agricultural support of prices penalizes the poor because the poor spend a much larger proportion of their incomes on food. Remember, too, that subsidies and price supports invariably benefit rich farmers more than poor ones.

Even before the launch of the Doha round, in November 2001, it was clear that a successful outcome would have to include a major shift in agricultural protection on the part of the industrial countries. That has not changed. It is a pity that policymakers remain reluctant to make—or feel politically constrained from offering—major concessions in this area.

Trade liberalization in developing countries

But while industrial country reform is a necessary condition it is far from being sufficient for developing countries to reap the potential benefits of a successful Doha outcome. Ending subsidies in rich countries, and opening those markets to developing country producers is a legitimate demand. But it is one that enables developing country governments, acting intentionally or otherwise, to distract attention from the pressing need for them to open their own markets.

Nearly 40% of developing country exports now go to other developing countries. Developing country trade barriers are often higher than those in industrial countries. African cocoa producers, for example, face higher tariffs for their products in Korea and Turkey than they do on their exports to the US and the EU.

The benefits that developing countries could gain from their own trade liberalization are enormous. The Fund's analysis shows clearly that developing countries have most to gain from the removal of agricultural trade distortions in the developing world. The GTAP model suggests that if all countries had removed agricultural trade distortions in 1997, there would have been gains for developing countries of $122.2 billion in terms of higher export earnings. More than 80% of those gains would have come from the removal of trade distortions in developing countries themselves.

Each year of delay imposes a real cost on the citizens of developing countries.

Developing countries also stand to reap a disproportionate share of the dynamic gains from trade liberalization. The World Bank reckons that by 2015, the gains from global trade reforms that brought agricultural tariffs down to 5% for industrial countries and 10% for developing countries, would deliver rises in real incomes for low and middle income countries of around $80 billion (in 1997 dollars) in terms of static effects—and $167 billion in terms of the dynamic effects. These gains are substantially higher than those for industrial countries.

In pretty much every calculation, the potential benefits from trade liberalization far outweigh the sums developing countries get in the form of aid and debt relief.

The role of economic analysis

We know that economic analysis is a vital tool in the struggle to achieve fundamental reform of agricultural trade. It is important to be able to demonstrate that the case for free trade, and trade liberalization, is unequivocal, that the gains to be had are large and real.

In a sense, we are talking about a battle for hearts and minds. Entrenched interests in the industrial world are a powerful force in favor of retaining protection. Governments must be encouraged to resist politically effective agricultural lobbyists. The more clearly the case is made for the benefits that would accrue to taxpayers and consumers, the stiffer might be the backbone of governments accustomed to bowing to loud, vehement, but intellectually groundless arguments in favor of special treatment.

This can mean approaching the challenge, and using the data at our disposal, in a novel way. I'm sure by now some of you have heard my favorite illustration of the folly of agricultural support. But let me tell it anyway.

Somebody has taken the trouble to do some calculations putting the cost of farm support in the OECD countries into context. It turns out that those countries spend enough to send every one of the 56 million cows in the OECD's dairy herd on a round the world ticket every year. Given the damage that such subsidies do to the world trading system in general, and to the poor in particular, luxury holidays for cows might be worth investigating.

More seriously, the subsidy we're talking about—$2.7 per cow per day—is more than twice the average daily income of a small and marginal farmer in the third world. Such subsidies are economic nonsense and we should use every means at our disposal to point this out.

But it is important to ensure that economic analysis is used dispassionately. We cannot allow governments and lobbyists to use economics in a selective way in order to advance their own cause. In particular, this means steadfastly refusing to let developing countries off the hook.

The potential benefits to be had from developing country trade liberalization are large—and indisputable. There is no intellectual justification for the world's poorer countries to argue that they cannot or should not make a move until the industrial world has acceded to all the developing country demands. That would simply penalize citizens and farmers in the developing world, and deprive them of the benefits of growth.

The emphasis needs to be on the removal of market distortions, in rich countries and poor countries alike. There is a strong case for tariff reduction in developing countries. There are also some specific policy reforms that could help poorer farmers, and thus consumers, in these countries. Three areas are especially important:

The exchange rate: besides confronting a distorted global market, farmers often have to cope with fixed exchange rates at home, when inflation is high or rising.

Farmers often face high-priced inputs that result from import-substitution policies aimed at protecting domestic manufacturing. This can choke off agricultural productivity improvements and reduce potential yields.

And government spending in poor countries is often skewed in favor of urban populations, at the expense of the poorest farmers.

Economic analysis can help shape better macro and micro policies in these countries. Campaigners often talk about the need for policies to be pro-poor. We in the IMF explicitly endorse the idea of pro-poor policies. But above all this means delivering macroeconomic stability. That in turn means an end to market-distorting policies. Economic actors need the proper incentives, in poor countries as much as rich ones.

The IMF's role

The Fund has worked hard to support the Doha process. We and the World Bank have worked in close consultation with the WTO to buttress that organization's efforts to reach a settlement. That is hardly a new departure, of course: the Fund has always worked to assist the process of trade liberalization: growth through the expansion of trade is part of our core mandate. It is our task to help achieve and sustain global financial stability—a pre-requisite for the expansion of trade.

We conduct Article IV surveillance consultations with almost all of our 184 members every year (a few have such consultations at slightly less frequent intervals). As part of that process we draw on economic analysis to seek to persuade our members of the benefits of free trade, and the need to liberalize further.

Of course, our leverage varies depending on the country and, in particular, on whether it is receiving financial assistance from us to support a program of economic reform. At such times, we can exert more pressure on national authorities to move away from market-distorting policies, or refrain from taking them in the first place. Not that long ago, Fund staff successfully persuaded a developing country government to postpone indefinitely plans to increase tariffs on poultry products. Such increases would have benefited the one large domestic poultry producer at the expense of that country's poorest consumers.

Conclusion

One session of your conference this morning was entitled Building momentum for reform. I would like to think that we are at the stage of building on progress. I don't yet feel confident that is so.

As I said at the outset, I do think we've have made a little progress since last year. There is a long haul ahead of us, though—the Doha negotiators managed to ensure everyone drew back from the brink. As yet, though, the signs of a genuine commitment to fundamental reform, and especially in the agricultural area, are absent.

That they are absent in both the industrial and developing countries is, I think of greatest cause for concern. There is an important intellectual battle to be fought, to convince everyone involved that everyone needs to accept the need for reform. There may be a strong moral case for expecting the industrial countries to end protection and market-distorting subsidies. But to stop there would be a betrayal of the poorest in our global society. The largest benefits will flow from liberalization among the developing countries.

We have to get that case across. That means marshalling the evidence. It means conducting further research in areas that would help illuminate what is at stake. It means arguing the case with policymakers, with well-meaning NGOs and with special interest lobbyists.

I know you have been examining how best to move forward during your discussions here. Sound analytical research has a vital part to play in these arguments, and I hope you have identified areas for further study.

Debate is important, too, debate based on high quality economic analysis. I hope too that your discussions have helped identify areas of agreement and difference and so clarified the arguments.

Most of all, I hope those of you directly involved in the Doha negotiations will return home, or to Geneva, with a clearer understanding of what is at stake: the huge benefits to be had from substantial agricultural trade liberalization, and the costs of failure. I wish you well.

Thank you.