Fifty Years of Distortions in f y fWorld Food Markets

Kym AndersonUniversity of Adelaide, World Bank and CEPRUniversity of Adelaide, World Bank and CEPR

IFPRI Seminar, Washington DC, 14 October 2008

Financial assistance from the World Bank Trust Funds, particularly from DfID, BNPP and the Rockefeller Foundation’s Bellagio Center , plus in-kndsupport from IFPRI, are gratefully acknowledged, as are the contributions of the country case study authors and the Washington- and Adelaide-based teams. Views expressed are the authors’ alone and not necessarily those of the World Bank or its Executive Directors, nor IFPRI. Project details are at

www.worldbank.org/agdistortions

Background

In 1958 the Haberler Report on Trends in International Trade warned the GATT Contracting parties of theTrade warned the GATT Contracting parties of the threat of agricultural protection growth in rich countries D. Gale Johnson, in his 1973 book on World Agriculture in Disarray, despaired at the persistence of:in Disarray, despaired at the persistence of:

high agricultural protection in OECD countries,anti-agric and anti-trade policies of developing countries, andthe tendency for both sets of countries to insulate their domestic yfood market from international price fluctuations, thereby exacerbating price volatility for the rest of the world

Disarray worsened for another dozen years, with agric protection growth in Europe North America and Japanprotection growth in Europe, North America and Japan peaking in 1986, thanks to an agric export subsidy warMeanwhile, some middle-income economies ‘overshot’, going from taxing their farmers to protecting them fromgoing from taxing their farmers to protecting them from import competition (e.g. Korea, Taiwan)

Raising concerns that other emerging economies may follow suit

Background (cont.)

However, since the mid-1980s some high-income and developing countries (HICs and DCs) have reformed somewhat

M i l il t ll b t l tl i tMainly unilaterally, but also partly in response to international pressures:

• the Uruguay Round, g y ,• WTO accession conditions, • structural adjustment loan conditionality by IFIs

H thi i d t fHas this improved prospects for poorer agrarian countries to export their way out of poverty?poverty?

Three questions being addressed by a World Bank research projecta World Bank research project

To what extent have developing economies moved away from taxing agric relative to other tradableaway from taxing agric. relative to other tradable sectors as they’ve grown?

and within the agric sector, what is happening to agric protection from import competition in DCs as compared withprotection from import competition in DCs, as compared with HICs? And to agric support globally?

How has that affected global agric markets, economic welfare and net farm incomes:welfare and net farm incomes:

retrospectively (since the early 1980s)?prospectively (ie, if remaining distortionary policies were removed)?removed)?

What of the future, given the evolving domestic politics, the Doha round struggles, and in view of the recent hike in world food prices?recent hike in world food prices?

Analyses and elements of explanation f li t d t th id 1980for policy trends up to the mid-1980s

Anderson and Hayami (1986) on agric protectionAnderson and Hayami (1986) on agric protection growth in NE Asia compared with that in WE and USKrueger, Schiff and Valdes (1988, 1991) on anti-agricand anti-trade policies of 18 developing countriesand anti-trade policies of 18 developing countriesTyers and Anderson (1986, 1992) on the econ effects of distortions to world food markets

Suggested the OECD countries’ agric policies depressed real international food prices in early 1980s by 20%, but that developing countries’ food policies almost fully offset that (reducing the int’l price-depressing effect to just 1%)(reducing the int l price depressing effect to just 1%)Together the domestic-market-insulating nature of those anti-trade agric policies made international food prices >3 times more volatile than they otherwise would have been in early ‘80sy y

So empirical indicators need to show what has happened in DCs and HICs to:what has happened in DCs and HICs to:

Anti- (or pro-)agricultural policy bias intersectorallyAnti-trade bias within the agric sector

Import protection vs export taxation (or subsidies)Dispersion of distortion rates across industriesDispersion of distortion rates across industries within the agric sector

since welfare cost increases with dispersionl f h d k fInsulation of the domestic market from

volatility in the int’l agric marketplacesince the latter is exacerbated by the formers ce t e atte s e ace bated by t e o e

Outline: 2 main courses plus dessertWhat did the World Bank project learn from its NRA/CTE estimates and other indicators?NRA/CTE estimates and other indicators?What global effects have reforms had since the early 1980s? What more could be contributed? ea y 980s at o e cou d be co t buted

retrospective and prospective global CGE modeling

What prospect is there for further reform?p p

Fi t iFirst main course

New estimates ofNew estimates of changes in distortionsover the past 50 yearsover the past 50 years

Structure of the World Bank’s current research projectcurrent research project Stage 1 (2006-08): [to be summarized today]

Country case studies, to provide time series of the extent of i i di t ti d l ti l ti l i i thagric price distortions and an analytical narrative explaining the

evolution of agric price and trade policies since mid-1950s• leading to 4 regional volumes (on Africa, Asia, Latin America and

Europe’s transition economies), plus a global overview book p ), p g(including the high-income countries), plus public global database

• 75 countries covered (India and Ethiopia by IFPRI staff)

Stage 2 (2008-09): [to be presented at IATRC in Dec.]g ( ) [ p ]More-intensive empirical analysis across countries and over time of causes, and of effects on inequality and poverty, of chosen vs. alternative policies

d d d l h b• Leading to 2 more edited volumes in 2009, with IFPRI contributing

Indicators estimated as part of the World Bank researchWorld Bank research

We began with nominal rates of assistance(NRAs) for major crop and livestock products(NRAs) for major crop and livestock products

covering 70% of gross value of agric production at undistorted prices in each of 75 focus countriesAlso included are ‘guesstimates’ of NRAs for the other 30%, plus non-product-specific assistance

W l l l t th g oss s bsidWe also calculate the gross subsidy equivalent (GSE) of assistance to agric, in total and per farmer (in constant 2000 US$)total and per farmer (in constant 2000 US$)And counterpart food consumer tax equivalents

Project’s focus countries: number and 2000 04 shares (%) of global economy2000-04 shares (%) of global economy

No. of countries

Pop’n share

AgGDP share

GDP share

Africa 21 11 7 1

Asia 12 51 37 11Asia 12 51 37 11

Latin America 8 7 8 5

European TEs 14 7 7 3

High-income 20 14 33 75High-income 20 14 33 75

WORLD TOTAL 75 90% 92% 95%

Product coverage of nominal rate of assistance (NRA) estimatesassistance (NRA) estimates (% of national agric prod’n of focus countries)

1980 84 1990 94 2000 041980-84 1990-94 2000-04

Af i 1 1 2Africa 71 71 72Asia 75 73 66Latin America 65 69 70SUB-TOTAL, focus DCs 73 72 67European transition econs 62 61 60High-income countries 70 70 70High income countries 70 70 70TOTAL, focus countries 71 70 68

Global coverage of NRA estimates for 30 major agric productsfor 30 major agric products

Share (%)of global ag

Share (%) of global agof global ag

productionof global ag

exports

Grains and tubers (10) 85 90Grains and tubers (10) 85 90

Oilseeds (6 products) 78 85

Tropical crops (7) 74 71

Li t k d t (7) 72 88Livestock products (7) 72 88

SUM OF ABOVE (30) 77 85( )

NRAag: high-income and developing countries, 1955-2004 (%, wted averages)countries, 1955 2004 (%, wted averages)

60

70

40

50

60

20

30

perc

ent

10

0

10

1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

p

-30

-20

-10

30

HIC & ECA HIC & ECA, incl. decoupled payments Developing countries

NRA by region (%), 1980-84 vs 2000-04

120140 1980-84

2000-04

6080

1002000 04

0204060

-40-20

0

a ia C A Z E n

Africa

Asia LAC

ECA

ANZNorth

America WE

Japan

Nor

GSE (constant US$b), 1980-84 vs 2000-04

130

50

90

-30

10

-110

-70

110Africa ANZ LAC ECA North

AmericaJapan WE Asia

1980-84 2000-04

Global subsidy equiv. for all ag., 1955-07: it continues to grow (constant 2000 US$b )it continues to grow (constant 2000 US$b )

300

100

200

0

100

200

-100

-2001955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04 2005-07

Developing countries (no averages for periods 1955 59 and 2005 07)Developing countries (no averages for periods 1955-59 and 2005-07)

High-income countries and Europe's transition economies

Net, global (decoupled payments are included in the higher, dashed line)

Subsidy equivalent per farmerconstant (2000) US$ per yearconstant (2000) US$ per year

1980-84 1990-94 2000-04

DCs -140 -10 50

HICs 8,170 11,330 9,920

HICs (incl 9 140 12 890 13 530HICs (incl. decoupled)

9,140 12,890 13,530

Consumer tax equivalent per capitaconstant (2000) US$ per yearconstant (2000) US$ per year

1980-84 1990-94 2000-04

DCs -22 -1 8

HICs 195 175 95

In DCs: NRA ag export taxation disappearing, but ag import-competing NRA is >0 & growingg p p g g g

40

50

10

20

30

20

-10

01955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04pe

rcen

t

-40

-30

-20

-60

-50

C d i t ti i lt l d tCovered import-competing agricultural products

Covered exportable agricultural products

In HICs: export support >0 but now falling

90

50

70

10

30

-10

10

1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

50

-30

Import-competing Exportables Total-50 Import competing Exportables Total

Long-run trend in NRA import-competing ag. goods: growing as fast in DCs as in HICs (hence the need for market access disciplines via Doha commitments)

80

60

70

40

50

erce

nt

20

30

pe

0

10

1955 59 1960 64 1965 69 1970 74 1975 79 1980 84 1985 89 1990 94 1995 99 2000 041955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

High-income countries Developing countries

What about relative rates of assistance, for farmers vs non-ag producers?for farmers vs non ag producers?

Assistance to non-ag tradable sectorsAssistance to non ag tradable sectors (NRAnonagt) can be as important for farmers as direct agric policies, in terms of encouraging ( di i ) i i(or discouraging) resource use in agric

Lerner’s (1936) Symmetry TheoremSimple criterion for anti-agricultural bias inSimple criterion for anti-agricultural bias in policy: Is RRA < 0, where

RRA = (1+NRAagt)/(1+NRAnonagt) – 1( g )/( g )

For HICs, RRA is similar to NRA…

100NRA agricultureNRA i lt

80NRA non-agricultureRRA

40

60

0

20

-20

01955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

-60

-40

… although much variation within HIC group

200 Japan/ KoreaNon-EU WEEU

100

150EUCanadaUSAustralia/ New Zealand

50

100

0

50

-50

55-5

9

60-6

4

65-6

9

70-7

4

75-7

9

80-8

4

85-8

9

90-9

4

95-9

9

00-0

4

05-0

7

195

196

196

197

197

198

198

199

199

200

200

Evolution from negative to positive average relative rate of assistance for DCsrelative rate of assistance for DCs …80

40

60

0

20

erce

nt

-20

01965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

p

-60

-40

RRA NRA non-ag tradables NRA ag tradables

RRA rise is greatest for Asia, least for Africa

0

10

20

-10

01965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

-30

-20

perc

ent

-50

-40

-70

-60

Asia Africa LAC

…especially in China & India: >half due to cuts in non-ag protection, which is now very lowcuts in non ag protection, which is now very low

INDIA CHINA

Contribution of exchange rate distortion to China’s RRA (percent)(p )

1981-84 1985-89 1990-94 1995-99

RRA, incl.h t

-61 -50 -31 -3exchange rate distortionRRA l 52 41 27 3RRA, excl.exchange rate distortion

-52 -41 -27 -3

distortion

China’s RRA trend helps explain two apparent paradoxes:apparent paradoxes:

China has remained close to self sufficient in farm products over the past three decades

… yet was expected to experience rising import dependence in food and fibre given its relativelydependence in food and fibre, given its relatively low endowment of agric land per capita and rapid industrialization

China’s commitments under WTO to cut agric tariffs was expected to reduce agric self sufficiency and add to farm household poverty

That hasn’t happened either. Instead, farm household incomes have been rising in all decileshousehold incomes have been rising in all deciles and in all regions of that country

All agric and processed food: 100(X-M)/(X+M)(includes cotton, whose net imports grew with end of MFA)( p g f )

percent1980-84 1985-89 1990-94 1995-99 2000-04

percent

China 9 7 19 1 -16C a 9 9 6

South Asia

8 3 10 1 -6

H h l b l li f iHow much global policy reform progress since the early 1980s? A two-dimensional summary:

Reductions in the anti-ag sectoral bias in DCs, and the pro-agric sectoral bias in HICs, would p g ,mean the RRA is approaching zero, where relative rate of assistance to farmers vs producers of other tradables isproducers of other tradables is RRA = (1+NRAagt)/(1+NRAnonagt) – 1

Reductions in the anti-trade bias within agricwould mean the trade bias index is approaching

h T d Bi I d f ll i izero, where Trade Bias Index for all agric is TBI = (1+NRAagx)/(1+NRAagm) – 1

RRA and trade bias index: 1980-84 vs 2000-04

Japan

150

e (%

)

WEJapan

100

Ass

ista

nce

AsiaLACECA

WE

NA NAANZ0

50ve

s R

ate

of

Asia

Africa AfricaLAC

ANZ

500

Rel

ativ

-5

-.4 0-0.6 -0.2 -0.1-0.2-0.3-0.5Trade Bias Index

RRATriangle: 1980-84, Circle: 2000-04

However, dispersion in NRAs (in addition to that due to anti-trade bias) is still high) g

Across countries and sub regionsAcross countries and sub-regionsAnd across commodities within each countrycountry

Whi h i iWhich means resources in agric continue to be inefficiently allocated both between and within countriesboth between, and within, countries

Cross-country dispersion in NRAagric, 2000-04

150

100

50

0

-50

abw

eiv

oire

mbi

aza

nia

ntin

aio

pia

rain

ene

gal

geria

Egy

ptag

uaud

anA

frica

roon

iland

asca

ran

datra

liais

tan

aysi

a R

epde

shal

and

garia

hana

Bra

zil

Chi

leC

hina

olan

dK

enya

anka

uado

rex

ico

nesi

aIn

dia

ussi

aU

Sto

nia

tnam

pine

sur

key

nada

mbi

ah

Rep

biqu

eva

kia

uani

aSp

ain

ngar

yrtu

gal

Italy

Latv

iam

ark

ranc

em

any

nlan

dU

Ked

enus

tria

ands

man

iaiw

anel

and

veni

aK

orea

rland

orw

ay

Zim

baC

ote

d 'i

ZaTa

nzAr

ge Eth Uk

Sen

Nig E

Nic

ara S

Sou

th A

Cam

eTh

aM

adag

aU

gaAu

sPa

kM

ala

Dom

inic

anBa

ngla

dN

ew Z

ea Bulg G B C C Po K

Sri L Ec

u MIn

don

Ru

Est

Vie

Phili

pp TuC

aC

olo

Cze

chM

ozam

bSl

ovLi

thu S

Hun

Por L

Den Fr

Ger

mFi

n

Sw

eA

uN

ethe

rlaR

om Ta IreSl

ov KSw

itze No

NRAs by product: DCs versus HICs

Rice

Milk

Sugar

Milk

Sugar

Rice387

Wheat

Poultry

Rice

Poultry

Beef

Milk

Coffee

Pigmeat

Maize

Soybean

Pigmeat

Cotton

Beef

Soybean

Coffee

2000-04

1980-84 Wheat

Maize

Soybean

2000-04

1980-84

Cotton

Coconut

Rapeseed

Barley

-150 -50 50 -150 -50 50 150 250

Also insulation of food markets persistsAlso, insulation of food markets persists, so volatility of int’l food prices continuesFluctuations around trend NRAag from year to year remain common, esp. for food staples such as ricestaples such as riceThis reluctance to import instability from int’l food market, and tendency to export , y pinstability from domestic food market, imposes an international public ‘bad’ on the rest of the worldrest of the world

Beggar-thy-neighbour behavior: requires more WTO discipline, including on export policy?

Rice NRA for South Asia is inversely correlated with int’l priceinversely correlated with int l price

6002030

400

500

01020

300

400

USD

30-20-10

NR

A %

100

200

-50-40-30

-

100

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

-70-60

197

197

197

197

197

198

198

198

198

198

199

199

199

199

199

200

200

200

Pw S Asia

What have we learned?Inter-sectoral anti-agricultural bias has declined greatly and their intra-agric sector anti-trade bias alsogreatly, and their intra agric sector anti trade bias also has declined somewhat on average in DCs since 1980s

And pro-agric bias in HICs also has declined somewhat But some reforming DCs have ‘overshot’ in the sense ofBut some reforming DCs have overshot , in the sense of moving from RRA<0 to RRA>0 as their incomes rose

But, within agric, the dispersion across product NRAs is still high in many countries as it is across countriesstill high in many countries, as it is across countries

much resource misallocation within and between countries stillAlso, trade measures continue to contribute to int’l food

i l tilit b tt ti t t bili d ti f dprice volatility by attempting to stabilize domestic food marketsSo, how far have these reforms reduced the disarray in yworld agricultural markets?

S d iSecond main course

New estimates ofNew estimates of global effects of

2004 policies

Global CGE resultsNew global, economy wide modeling results (from Linkage Model) on effectsresults (from Linkage Model) on effectsof national price distortions, drawing on WB project’s NRA estimates as of 2004WB project s NRA estimates as of 2004 and comparing their effects with:

What 1980 84 distortions’ effects were andWhat 1980-84 distortions’ effects were, andWhat the world would be like with fully liberalized goods marketsliberalized goods markets

New agric distortions we insert in global model for 2004 (%)global model for 2004 (%)

Agric Agric Agric Non-ag domestic support

export subsidy

import tariff

import tariff

HICs 3 7 22 1HICs 3 7 22 1

ETEs 1 -0 22 8

DCs:Africa -1 0 20 11Asia 2 1 30 8

L Amer -0 -1 8 6L Amer 0 1 8 6

WORLD 2 3 22 3

S f t f li i tSources of cost of policies tothe global economy (%, 2004)

Due toAgric & food

Other merch.

ALL GOODS Due to

policies in: policies tariffs SECTORS

High-income 36 6 42High income countries

36 6 42

Developing 24 34 58Developing countries

24 34 58

WORLD 60 40 100

Sources of costs of policies toSources of costs of policies todeveloping economies (%, 2004)

Due toAgric & food

Other merch.

ALL GOODS Due to

policies in: policies tariffs SECTORS

High-income 53 12 65High income countries

53 12 65

Developing 30 5 35Developing countries

30 5 35

WORLD 83 17 100

Reform effects: retrospectively since 1980-84 and prospectively as of 20041980 84, and prospectively as of 2004

Reform from 1980 84 t

Move to f t d1980-84 to

2004free trade

as of 2004Global econ welfare $b (%) $233 (0 8%) $168b (0 6%)Global econ welfare, $b (%) $233 (0.8%) $168b (0.6%)

DCs’ econ welfare, $b (%) $73b (1.0%) $65b (0.9%)

% global ag output exported 9% 8% 8% 13%

DC share of global ag output 58% 62% 62% 65%g g p

DC share of global ag exports 43% 55% 55% 64%

% rise in int’l ag &food prices 13% <1%% rise in int’l ag &food prices 13% <1%

% rise in DC ag (nonag) VA 4.9%(0.4%) 5.6%(1.9%)

What do these CGE results imply?

Economic welfare cost to world (to DCs) of global distortions to goods markets has fallen by 58% (46%)distortions to goods markets has fallen by 58% (46%) since early 1980s

and DCs gained disproportionately from reforms since early 1980s, and would again from completing the process (0.9% vs1980s, and would again from completing the process (0.9% vs 0.6% for HICs)

Of that prospective gain to DCs, 5/6ths would be due to agric policy reform, of which 2/3rds would come fromagric policy reform, of which 2/3 would come from HIC policies

means DCs have a much bigger stake in WTO’s Doha round, and esp. its agric negotiations, than previous analyses usingand esp. its agric negotiations, than previous analyses using GTAP protection database suggest

• Why are DCs so reluctant to engage in DDA and commit?

DC farmers have gained since early 1980s, and wouldDC farmers have gained since early 1980s, and would be main gainers from completing the reform (5.6% boost to ag value added vs 1.9% for nonag VA)

D tDessert

Future policy trendsp yand prospects for

more reformmore reform

Will DCs stop RRA at zero, or follow HICs with positive and rising RRAs as their incomes grow?

400

%)

0030

0ss

ista

nce

(%10

020

Rat

e of

As

0R

elat

ive

-100

-1 0 1 2 3Ln real GDP per capita

HIC RRA obs HIC fitted valuesDC RRA obs DC fitted values

Korea and Taiwan followed Japan …0

200

0015

0)

501

RR

A (%

0-5

0

7 8 9 10Ln real GDP per capitaLn real GDP per capita

Japan Korea Taiwan

… so will China and India too, to avoid social unrest from widening urban-rural income gap?f g g p

200

015

050

100

RR

A (%

)0

-50

7 8 9 10Ln real GDP per capita

China Japan Korea Taiwan India

Are WTO bindings helping to prevent agric protection growth in developing countries?

Most DCs have very high binding overhang in agric (gap between WTO-bound and appliedagric (gap between WTO-bound and applied tariff or domestic subsidy), following the Uruguay Round Agreement on Agricultureg gChina has little overhang on tariffs on average, but plenty where it matters, and also lots of p yoverhang in bindings of domestic farm subsidies

Chi ’ WTO it t ll id blChina’s WTO commitments allow considerable scope for agric protection growth

Out-of-quota tariffs are high (currently prohibitive):prohibitive):

65% for grains50% for sugarg40% for cotton

And China is allowed up to 8.5% product-specific domestic support, plus another 8.5% non-product-specific assistance (or more if ‘d l d’ h t f d ti )‘decoupled’ somewhat from production)

Bindings matter: What if agric protection in Japan and Korea had been bound when they joined GATT?y j

200 Japan(1955 = 16.6%)

China(2001 = 4.5%)

100

150 Korea(1967 = 7.4%)

( )

50

100

A (%

)

01955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05

NR

-50

1955-59 1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05

-100Japan Korea China

If Chi h t k it RRAIf China chooses to keep its RRA near zero, will it push up int’l food prices?China’s impact on int’l prices of food has been less than for minerals and energybeen less than for minerals and energy

because of low income elasticities of demand for food and rising RRA over the past 3 decadesfood and rising RRA over the past 3 decades

Now with China’s RAA close to zero, its future agric import growth could acceleratefuture agric import growth could accelerate if it chooses not to follow Ja/Ko/Ta in raising its NRAag continually over timeraising its NRAag continually over time

Implications for WTO negotiationsNeed large cuts to bound tariffs and subsidies so as to reduce prospect of:

trend NRAag and RRA rising with incomestrend NRAag and RRA rising with incomescontinuing fluctuations around trend for product NRAs via variable trade restrictions

Need to not only ban agric export subsidies but alsoNeed to not only ban agric export subsidies but also discipline agric export restrictions at WTO?As a quid pro quo, abandon proposed ‘Special Products’and ‘Special Safeguard Mechanism’ (which will add to ag p g ( gprotection growth and to int’l food price volatility)?

and instead encourage DCs to pour more of their ag support into ag R&D, rural education and infrastructure (via aid-for-trade?)

C tl i R&D i i t j t 0 3% NRA i DC (1% i HIC )• Currently agric R&D is equiv. to just 0.3% NRA in DCs (1% in HICs)

ReferencesAnderson, K., M. Kurzweil, W. Martin, D. Sandri and E. Valenzuela, “Measuring Distortions to Agricultural Incentives Revisited” World Trade Review 7(4):Incentives, Revisited , World Trade Review 7(4): 675–704, October 2008Valenzuela, E., D. van der Mensbrugghe and K. Anderson, “General Equilibrium Effects of PriceAnderson, General Equilibrium Effects of Price Distortions on Global Markets, Farm Incomes and Welfare”, Ch. 13 in Anderson, K. and Associates, Distortions to Agricultural Incentives: A Global gPerspective, 1955 to 2007, forthcoming 2009For all project working papers and (by end-October 2008) the global agric distortions database, see

ldb k / di t tiwww.worldbank.org/agdistortions

Thanks!

ldb k / di t tiwww.worldbank.org/agdistortionskym.anderson@adelaide.edu.auy @

Trade Restrictiveness Index: a way of incorporating mean and dispersion in a single policy indicatorp g p y

The more NRAs vary across products within an agric sector, the more the sectoral average NRA

d t t th lf t f th di t tiunderstates the welfare cost of those distortionsespecially if some NRAs are <0 and others >0, as is often the case in DCs

Wh d l NRA CTE ( d )What common ad valorem NRA or CTE (or trade tax) would have the same effect on national econ welfare (or on trade volume) as the observed structure of

d C h d ?NRAs and CTEs across the product range?Taking into account that the welfare cost of a distortion is proportional to the square of its NRA or CTE

Variants of the Trade Restrictiveness Index

J. Anderson and P. Neary focused mostly on tariff equivalents and import restrictivenessand import restrictiveness

As has the World Bank’s global monitoring report to dateMeasured it from the viewpoints of welfare and trade reductions (using estimated import demand elasticities for each product)

But an early Anderson/Bannister (1992) paper, and a chapter of the Anderson/Neary 2005 book, look at PSEs and CSEs for Mexican agric

algebra is complex, and requires domestic demand and supplyalgebra is complex, and requires domestic demand and supply elasticities for each product

Lloyd (2008) simplifies the algebra, in part by being willing to make assumptions about domestic demand and supply elasticitieselasticities

Enables the calculation of separate producer distortion indexand consumer distortion index for covered agric products (PDI and CDI), and their combination (a welfare-reduction index, WRI), all of which are >0),Also enables the calculation of a trade-reduction index (TRI)

Assumptions to make index calculations possible with just NRAs and CTEspossible with just NRAs and CTEs

For PDI (or CDI), assume price elasticities of domestic supply (demand) are the same for each product, and cross-price l ti iti f l (d d)elasticities of supply (demand) are zero

For WRI and TRI, assume also that aggregate sectoral domestic supply and demand elasticities (ignoring sign) are equalAll that’s then needed are NRA and CTE estimates, andAll that s then needed are NRA and CTE estimates, and production (consumption) valued at undistorted prices to serve as weights to aggregate across parts of or the whole product range

And for TRI need to nominate the trade status of each industryAnd, for TRI, need to nominate the trade status of each industryWhile these elasticity assumptions are limiting, this at least takes us some way towards what a formal PE or CGE model can do in terms of capturing the welfare effect of a dispersed structure of NRAs within the agricultural sectorNRAs within the agricultural sector

Welfare reduction index: DCs, HICs and ETEs(percent)

80

60

40

0

20

1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04 2005-07

Developing countries Europe’s transition econs. High-income countriesb

NRAag, DCs, HICs and ETEs, 1955-2004(percent)(percent)

60

40

20

01955-59 1965-69 1975-79 1985-89 1995-99 2005-07

-20 High-income countries

High-income countries (incl. Europe's transition economies)

Developing countries

Welfare reduction index: Africa, Asia, LAm(percent)

60

80

40

60

20

01960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

Africa Asia Latin America

Points to note from WRI/NRA comparison

Africa’s NRA is zero in 1985-89, but that’s when its WRI is at its highestthat s when its WRI is at its highest (because large increase in NRAm meant it offset NRAx but added to WRI)x )This is also why Africa’s TRI spikes in the 1985-89 period (next slide)p ( )

Notice also on next slide the rapid TRI decline for Asia (whereas it turns up again li htl f Af i & LA ft 1990 )slightly for Africa & LA after 1990s)

Trade reduction index: Africa, Asia, LAm (percent)

60

40

0

20

01960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04

Af i A i L ti A iAfrica Asia Latin America

Trade reduction index: DCs, ETEs and HICs(percent)

60

40

20

-20

01960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04 2005-07

0Developing countries Europe’s transition econs. High-income countriesb

What have we learned?K/S/V’s inter-sectoral anti-agricultural bias has declined greatly, and their intra-agric sector anti-trade bias also has declined some hat on a e age in DC since 1980sdeclined somewhat on average in DC since 1980s But some reforming DCs have ‘overshot’, in the sense of moving from RRA<0 to RRA>0 as their incomes rose, rather than stopping at neutral policies (RRA=0)p ( )

Because on import side, agric protection growth continuesDomestic market insulation continues

Legally possible because of import tariff and export subsidy binding overhang at WTO and no discipline on export restrictionsoverhang at WTO, and no discipline on export restrictions

Within agric, there is still much dispersion across product NRAs in many countries

reflected in PDIs (and CDIs) being much higher than NRAs (and CTEs)

Next question: How far have these reforms reduced the disarray in world agricultural markets?