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Hello all, I?m afraid this is a long-termism blue-sky contribution incarnate (sorry Duncan). But it draws on some interesting debates happening in the world of political economists, and I hope will throw some ideas about, and who knows? perhaps refresh those normally used to trade policy minutia. I have a concern that despite the hallowed place that agricultural trade occupies in public and political debate on trade reform and ?making globalisation work for the poor? the current assumptions we rely on are simplistic and lack both adequate understanding of key issues and also realism in the political outcomes they are predicated on. Over optimism coupled with lack of rigorous analysis (often a natural partnership) ranges from the overheated sentiments from some advocates of agricultural trade liberalisation at the WTO to noises coming from the Bank and Fund (stressing agricultural trade reform over increased debt relief and aid as a way to meet the MDGs). It is also reflected in DFID?s, and the British Government?s, thinking on this issue ? including DFID?s thinking on the correct orientation of developing country domestic agricultural policy. In outlining DFID?s agricultural policy to the International Development Select Committee Suma Chakrabarti stated that the aim was to ?get the (partner) governments concerned to focus much more on sorting out?for the great day when the CAP is reformed?how they would get their agricultural sectors to perform better?. Lots of bets are being put on agricultural trade as the key to poverty reduction ? in particular for Africa. But is this enough? What problems have we not thought through properly? What potential obstacles are there? And what does this mean for policy ? at the international level and for individual developing countries? The narrative that seems to be coming from the British government on trade and development is ?reform the CAP and Africa will succeed in global trade?. It is not clear that DFID has thought through making sure that the former leads to the latter, one of the criticisms of the International Development Committee report that has led to this consultation. I think there are two clear areas where we have an inadequate understanding at present: · Firstly, of the behaviour of global agricultural markets, · And secondly, of the pre-requisite requirements for success within these markets, in particular the role of the state and public policy. As the host is a member of the ?more history less maths? school of development thinking, I?d like to examine these two areas whilst drawing on the historical experiences of successful agro exporters in achieving economic growth and development. Firstly, we need a better understanding of the behaviour of global agricultural markets. Our understanding is inadequate, and what we do observe has little impact on policy. Global agricultural markets have a marked tendency towards boom and bust behaviour (with the emphasis firmly on bust). They also have a tendency towards, and history of, individual rationality leading to collective irrationality. This is a reasonably well-documented subject, but to state the basic pattern: Over investment and excessive borrowing by many actors, leads to overproduction and overcrowding of a limited market, this leads to declining returns, whilst the overshoot of investment combined with decreasing returns leads to crises in profitability and, often, in liquidity. This is aggravated by two factors: Firstly, agricultural exports are vulnerable to ?Engel?s law? (that?s Ernst not Fredrich). As income rises the proportion of income spent directly on food and fibres declines, therefore the proportion of agricultural trade in total global trade tends to fall. Agricultural markets are both limited in size and prone to long term declining terms of trade. Secondly, the qualities of agricultural production also contribute to these tendencies to overcrowding. Agricultural investment and the ?coming on stream? of production are over a longer timescale. Agricultural factors of production also behave differently and are either ?stickier? or at times even completely static, leading to sluggish reactions to changes in supply and demand ? land for example will tend to stay in production even if market conditions are bad or if an individual farm business unit goes under. In short, the behaviour of global agricultural markets has its own, often problematic, patterns with important implications for policy. These are not incorporated very well either into current economic or political thinking. Market behaviour has important implications for which actors are able to succeed in agricultural trade. This leads us to the second area. The pre requisites for success in global markets There are interesting lessons to be learnt from examining the history of countries using comparative advantage in agricultural production to pursue successful (and unsuccessful) agro export led development strategies. In particular it?s worth looking at those examples where this strategy worked on the largest scale ? those agricultural exporters during the last significant era of liberal trade in agriculture in the 19th century: the USA, Canada, Australia, New Zealand, Argentina and Brazil. The challenges for producers and their states were threefold: · How to mobilise resources to invest and manage productive activities in agriculture · How to generate rapid increases in output, quality and efficiency in agricultural production · How to take advantage of the benefits, but mitigate the costs, of global agricultural markets The lesson from these countries experiences is that all three challenges pose greater obstacles and give a much greater role to state intervention than the current orthodoxy would assume. In particular state intervention is necessary in order to: a. Create an efficient, competitive and capital intensive form of domestic agriculture b. To position an exporter successfully in global markets c. To cope with the peripherising effects of global markets All successful agro exporters states during this period played a large and interventionist role in ?manufacturing comparative advantage?, in creating the basic pre-requisites for, firstly, the participation of the private sector in agriculture and then, secondly, the participation of agricultural exporters in global trade. If you look at examples of agricultural exporters in the 19th century, the state played a massive role in creating the conditions for private actors to enter the market and in reorientating their economies around new export opportunities. To do this all countries had to resolve pressing collective action problems. The state organised inward flows of capital and labour, controlled significant levels of total investment (deploying as much as one quarter to one half of all investment at different times in the 19th century), undertook massive investment in infrastructure, including transportation, in the creation of labour markets, banking systems, social capital and land structure and ownership (for example the land grant system in the US, instrumental in creating a nationwide transport infrastructure and nationwide agricultural production). All were vital for private sector success, but none could have been provided for by the market alone. The state also directed or spent large amounts of investment in agricultural research and development, distributing new technology and information and encouraging producers to move into higher value products and improve export quality (for example the role of the U.S. Department of Agriculture, set up in 1862 by President Lincoln). Once up, running and hopefully competitive the next challenge was to cope with global agricultural market behaviour. The pattern throughout the 19th century was one of boom and bust. A large number of countries invested in production in similar goods with low barriers to entry. Because of the lag between borrowing and the emergence of productive capacity, everyone underestimated the volume of output that would emerge on world markets and overestimate the price they would get for their production. This was seen in periods of crisis in the 1850s, the 1890s and the 1920s. Rapid increases in regional output invalidated prior investment decisions which created periods of debt crisis for producers who were no longer able to generate sufficient revenues to service foreign debts. Collectively agricultural led export strategies tended to be fratricidal, whilst relative success for some meant failure for others. The challenge for private producers and the state was thus being able to keep solvent despite fiscal pain and debt burdens, but also being able to pursue alternative development strategies. State intervention became necessary to do both. States played an instrumental role in coping with crisis, but also encouraging movement to more profitable sectors ? either encouraging farmers to move into higher value products (such as happened in Australia with the move to dairy and beef production after the 1890 debt crisis) or trying to industrialise by creating backwards linkages and pursuing the cultivation of infant industry (a la the USA). To succeed thus depended on your ability to invest, rapidly increase productivity, remain competitive despite the imposition of additional costs and deteriorating terms of trade (lowered returns and higher debts) and within this upgrade to higher value forms of production. This strategy was very fragile. It depended on timing and a large dose of luck. In particular whether world agricultural markets are expanding, a favourable external investment climate, lack of initial competitive pressures, low barriers for entry into higher value production and the ability of your state to ride the shocks inherent in the strategy and manage the transition upwards. What lessons does this tell us about agricultural trade? Lesson number one is that external conditions are crucial and we need to pay attention to global market opportunities and conditions, investment flows and initial competitive pressures. Lesson two is that state policy is pivotal in creating and directing the factors and capacity necessary for agricultural export success. There are two sub themes here. One is that internal policies rely on the direction of a strong and, to some extent, interventionist state. The market and the private sector will not create the range of necessary conditions itself. The other theme is that the scale of input required is substantial, and this raises in size the lower the level of initial factors available. Success rests on possessing large-scale capital-intensive agriculture (with the necessary capacity, quality and efficiency), aided by major investment flows within a favourable infrastructure. This doesn?t come cheap. The third lesson that follows on from this is that policy and capacity are played out in relation to a dynamic market. Competitive pressures and timing have to be paid attention to. In this respect much lies on relative capacity of agricultural production and relative state competence in the first instance and then the dynamism of both your agricultural production and of your state policy in the second. Are the conditions today favourable to a development strategy based on agricultural exports? And do developing countries, in particular Africa, have the pre requisites necessary to be able to take advantage of these conditions? On these questions there are reasons to be cautious, In relation to the nature of demand and the structure of global trade. In the 19th century demand came from an industrial power (Britain), and then Europe, with a rapidly rising urban population. Successful exporters were reliant on displacing agricultural producers in the industrial core. Britain was also willing to sacrifice its own agricultural producers to the wider benefits from free trade (so that by 1900 60% of British calorie needs were from imported goods). Agricultural trade flows were large, growing and complementary with industrial demand. In the post 1945 world, up to the present day, the two largest blocs of potential demand (US and Europe) have implemented domestic policies which close off the export opportunities needed to drive any significant agricultural export led growth (in fact they have become the two largest agricultural exporter blocs). Whilst demand for agricultural goods fell as a proportion of total global demand (Prebisch?s critique came in part as a realisation of these new conditions). In the 19th century Britain was also the major creditor nation and was prepared to invest heavily in agricultural export producers. Today the major creditor nation (the US) has from the 1970?s become the major debtor nation, fundamentally re-shifting capital flows from the developing world inwards to finance its deficit spending, whilst investment flows to the developing world have changed in pattern and quality ? and are now dominated by the manufacturing sector and via FDI (via companies and supply chains rather than through financial institutions) whilst agricultural investment has been sidelined. Prospective developing countries wishing to drive development through agricultural exports no longer have the scale of access to a major industrial market to drive their agricultural sectors, nor such easy access to the capital with which to invest in them. Post 1945 examples of agro export led developers are much harder to find. The closing down of sufficient external demand for agricultural exports in the post war period saw development success resting on the ability to take advantage of new export opportunities in manufacturing. Amongst the East Asian tigers the role of agriculture was as a source of capital (extracted through large scale and radical land reform, boosting small holder production through an extension of credit and price fixing, and progressive tax structures) for infant industry, and applied according to a consistent outward looking development strategy (the export focus of which was firmly in manufactured goods). Those who tried the agro export root struggled against insufficient demand and declining terms of trade (witness the failure of Juan Peron?s use of this strategy in Argentina in the 40?s and 50?s). Is it likely that we will see a change in the scale and nature of this demand to a sufficient degree to propel successful development strategies? And where will this demand come from? The first possibility is that liberalisation in the US and the EU would lead to a displacement of domestic producers by exporters. This rests on problematic assumptions; one is that these countries will have the necessary political will to undergo painful and radical agricultural liberalisation (which for anyone with a passing knowledge of the political arrangements of the US congress or the EU Agricultural Council seems fairly unlikely) The second possibility is that demand will come from alternative markets, in particular in East Asia, which seems more promising. In both cases the growth of demand would have to be on a scale large enough to counteract declining terms of trade, or the current marginalisation of agriculture within global trade patterns would have to be reversed. But both increased demand from old or new markets raises the other problematic assumption about the producers who would be in the best position to take advantage of greater export space. The ability to take advantage of these opportunities will be seized by those actors with the most pre requisites for success. In this respect either the displacement of inefficient domestic producers in the North or the creation of new demand in the South is likely to be filled primarily by efficient and capital intensive agriculture. Too often the discussion about the benefits of agricultural liberalisation focus on the headline figures, and fail to differentiate between regions and countries in who would take advantage of new market opportunities. On looking at differential impacts, the weak position of Africa, or other poorer developing nations, in both relative capacity and relative state competence becomes fairly striking. This also leads on to questions about initial competitive pressures facing potential agricultural exporters. As has been hammered out here, as well as a producer?s capacity in one market, other producers? capacities in the same market matter. There are reasons to believe that agricultural trade?s position in the development strategies of a large number of developing countries make these competitive pressures much greater. This is not only the perennial problem of low barriers to entry in agricultural markets, but this is reinforced by the ?institutional monocropping? of the policies of the Bank and the Fund. The ?bottleneck? on the development ladder seems more crowded than ever. In external conditions of demand and investment, internal conditions of capacity and state competence and in the initial competitive environment, the simple assertion that poor countries will benefit from agricultural trade is questionable, and the idea that agricultural trade will form their sole development vehicle even more so. So what does this mean for DFID? I?m afraid this posting has been too broad brushed to then shift gear into the concrete next steps for DFID variety. What I would say it suggests is: At least the need for a more naunced approach of who will benefit from agricultural trade and how. I would argue that this would mean placing much less emphasis on the role of agricultural trade in achieving pro poor agricultural policy in those countries ill placed to exploit trade opportunities ? in particular those with large domestic agricultural sectors which are uncompetitive, suffer from severe low productivity, high levels of intern constraints and very high poverty linkages. And if DFID does see agricultural trade as the development vehicle for the poorest nations then in needs to: Pay more attention to market obstacles, and potential ways around them (guaranteed market access to EU and US markets for poorer nations perhaps? The supply management debate, or ?circuit breaking policies? that override market patterns ? by encouraging entrance into niche or underdeveloped market opportunities perhaps) Look more at investment obstacles. Seeking to encourage investment from the private sector in poor countries agriculture when the surrounding infrastructure is in a state of collapse seems overoptimistic. The private sector will not do the dirty work alone on this. Pay much more attention to differentiation of impact in likely liberalisation scenarios and responses. Re-examine its view of state policy and the scale of interventions. In particular it needs to be on guard to the danger of the homogenisation of policy responses and the need for ?dynamic comparative advantage? in policy prescriptions. Over to the rest of you Matt ============================================================= To send a reply to this message that goes to all list members, make sure that you send your reply to <address removed> To unsubscribe from this list, send an email to "<address removed>", with the message body: unsubscribe global-trade <your-email-address>
Please visit dfid-agriculture-consultation.nri.org.