The World Bank’s World Development Report 2008 addresses Agriculture for Development. This is the 30th yearly report on development and the first one on agriculture since 1982. Three-fourths of the world’s 850-900 million poorest people live in rural areas and depend directly or indirectly on agriculture for their livelihood. The World Bank’s interest in agricultural development fits with the Doha Round of WTO talks as the “development round.”
The new President of the World Bank, Robert Zoellick, is a former U.S. Trade Representative who understands the politics and economics of international trade and income growth. The Bank is also responding to an internal audit that criticized it for not focusing more on moving farmers beyond subsistence agriculture. This comes at a time when economic growth due to globalization makes developing countries less dependent on the World Bank.
World Bank analyses have estimated that by 2015 current subsidies and tariffs could have global welfare costs of $300 billion per year, with two-thirds of that associated with agricultural tariffs and subsidies. Agriculture and processed foods account for only 6 percent of global GDP and 9 percent of international trade. Developed country agricultural policies are estimated to cost developing countries about $17 billion per year, over 90 percent of which is from tariffs that restrict market access. There are exceptions like cotton where only 11 percent of the costs are due to tariffs.
Subsidies for agriculture in developed countries receive their usual criticisms. Among the developed country members of the Organization for Economic Cooperation and Development (OECD) support for agriculture as a percent of gross farm receipts has declined from 37 percent in 1986-88 to 30 percent in 2002-05. The EU, Japan, the U.S. and Korea provide 90 percent of the support of OECD countries with the EU alone providing for half of the total support. Japanese rice policies, EU sugar policies and U.S. cotton policies were singled out as examples of specific problems for developing countries.
The report notes that developing countries with strong economic growth tend to follow the example of developed countries by increasing support to agriculture after having spent decades taxing agriculture to support non-agricultural programs. For example, China and India have shifted from taxing agriculture to subsidizing it. Among urbanized developing countries rice and sugar are the two most protected agricultural products. Removal of all tariffs, domestic supports and export subsidies is estimated to increase real global prices for agricultural product on average by 5.5 percent and processed food by 1.3 percent. Developing countries’ share of total world agricultural exports would increase from 54 percent to 65 percent. The average price increase of 5.5 percent is led by cotton price increases of 20.8 percent, oilseeds 15.1 percent, dairy products 11.9 percent and coarse grains 7.0 percent. Wheat prices would increase by only 5.0 percent, rice 4.2 percent, fruits and vegetables 2.8 percent and sugar 2.5 percent. The biggest gains in export market share for developing countries would be in oilseeds with a 34 percent increase, cotton 27 percent, wheat 21 percent, processed meats 18 percent and sugar 9 percent.
Faster economic growth from increased agricultural trade would not be shared equally among developing countries. The estimated increase in annual agricultural output in 2015 with free trade compared to no changes in trade policies would be 2.0 percent for Latin America & the Caribbean. Sub-Saharan Africa would be the only other growth region at 0.4 percent. Agricultural growth for developing countries overall would be 0.3 percent.
The authors outlined their views on a successful agricultural agreement under the Doha Round trade talks. Since tariff policy changes account for 90 percent of the potential economic benefit of agricultural policy reforms, they want bound tariffs reduced enough to make a difference in trade flows. With average bound tariffs at twice the applied tariffs in developed countries and two and half time for developing countries, bound tariffs reductions must be larger than 50 percent to make real change in market access. The number of items treated as “sensitive products” with higher tariff rates will need to be sharply limited. If only 1 percent of the EU agricultural tariff lines are exempt from the general tariff reductions, the overall average tariff reduction would be cut in half. The same concern is raised for “special products” for developing countries that would have limited tariff reductions. While developing countries will have smaller tariff cuts than developed countries, the authors believe major tariff reductions are needed to support poverty reduction. Cotton is singled out as a crop where reductions in domestic programs in developed countries would have the greatest impact.
The report is relatively positive toward regional trade agreements for developing countries. Trade between countries with reciprocal trade agreements accounts for one-third of global trade. Regional agreements can address issues that are not part of multilateral WTO discussions and can provide economies of scale where individual country markets are small. African countries on average have four regional trade agreements and Latin American countries have seven. A Bank review of regional agreements concluded that national incomes are likely to increase where low external most favored nation tariffs have few exemptions and rules encourage trade.
The report concludes that a key element of reforms is to get market prices right through open trade policies. That would not solve all the problems of developing countries, but it is hard to imagine sustained economic growth benefiting low income people without trade policies that correctly transmit the demand for agricultural commodities produced by low income people.